How the 50/30/20 budgeting hack can unlock your finances

Budgeting is the key to running your finances smoothly. Whether you have a high or low income – or somewhere in between – a budget is important to maintain the levels of spending and saving you can afford.

Getting a handle on your income and outgoings can help reset your finances and spending patterns and to assess where your money goes every month.

A budget can also be a real help in achieving specific financial goals you might have. This could be saving for a summer holiday or new car, or raising a deposit for a house, a wedding, or even paying off debts.

There many different budgeting methods to choose from.

The 50/30/20 rule is a straightforward budgeting method that can help you to manage your money simply and effectively to help you live within your means and reach your goals – whether that’s to spend less to pay off debts or to save more for your future.

How the 50/30/20 rule works

This method of budgeting suggests dividing your monthly income into three spending categories: 50pc for “needs”, 30pc for “wants” and 20pc for “financial goals”.

The 50pc towards needs will be the portion that covers all the regular essential outgoings such as your mortgage or rent, and household bills such as gas and electricity, water, mobile phone, house insurance, as well as the cost of running a car if you have one.

You would then set aside 30pc for wants, which pays for things like hobbies and sports, socialising, shopping and subscriptions for TV, music streaming or newspapers and magazines.

The remaining 20pc can be used for financial goals, such as paying off debt, contributing to savings, making longer-term investments or saving into a pension.

The 50/30/20 rule can work, in theory, whatever your income level.

Someone earning £34,000 (around the UK national average) would take home £28,000 a year or £2,333 a month, according to calculations by Hargreaves Lansdown, an investment platform.

According to the 50/30/20 rule, this would give you £1,166 a month to spend on needs, £700 on wants, and £467 on savings. Assuming a 5pc pension contribution – which is £142 a month – that would leave you £325 to put aside in the savings pot.

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A higher earner on a salary of £60,000 would take home £46,357 a year or £3,780 a month.

It would give you £1,890 a month to spend on needs, £1,134 on wants and £756 on savings. A 5pc pension contribution – which is £250 a month – means you’re left with £506 to save or repay debts.

If you had a credit card debt of £5,000, you would be able to clear it in between 13 and 16 months if you used the budgeting rule.

Equally, this amount could go towards your £20,000 annual tax-free Isa allowance.

Sarah Coles, head of personal finance at Hargreaves Lansdown, said: “How you use the savings money will depend on your circumstances.

“Some will need to pay down expensive short-term debts, while others will want to build emergency savings, their pension or investments – often people will want to do all of these things, so will split the cash between the different goals.”

Bending the budgeting rules

One big problem with this method is that it might not be possible to get all your essential bills into the 50pc bracket.

Ms Coles said: “The proportions won’t work for everyone, largely because the cost of putting a roof over your head is so high in the UK.”

Ms Coles calculated that if you take a middle-income household who earns £32,651 after tax – or £2,721 a month – the cost of their basic essentials is £1,755 a month, which is 65pc of their income.

If you then put 30pc aside for wants, you’re left with next-to-nothing to save for the future.

It means you need to flex your “wants” to fit the cash available, and free up enough money for the future – which might work out as 65pc needs, 15pc wants and 20pc savings.

To cut the cost of your “wants”, you’ll need to come up with some sacrifices.

Having one less restaurant meal out each month can mean money is redirected to the needs pot, for example. You might also need to ruthlessly cut shopping sprees and subscriptions to achieve your goals.

If that doesn’t work for you, you might find that other breakdowns are more achievable – and these might change during the year as life dictates different spending patterns.

Ms Coles added: “Simple rules of thumb like the 50/30/20 one can be useful for keeping you roughly on track. However, it’s not a good idea to try to follow them without calculating whether they’ll work for you, or they could lead you astray.”

Timeless budgeting tips

Sticking to a budget can be tricky, and if you’ve already tried a method that didn’t work for you it can be easy to give up.

Budgeting isn’t a one size fits all situation. If you don’t think you can stick to such a strict regime like the 50/30/20 rule, some of these key budgeting tips to help you stay in control of your money.

1. Understand where your money goes

You might roughly know what you spend your money on each month, but it will help to know your exact outgoings – and what they’re spent on.

If you don’t review your spending often, one way to do this is go through your bank statements either online or on a banking app and make a list of the bills you pay as well as amounts for online subscriptions, eating out, travel, supermarket shopping, clothes, sports as well as other treats.

The list might be long, but you can then see where your earnings go – and where any savings can be made.

Many banking apps will automatically categorise your spending so you can easily see whether a large proportion of your money goes on eating out.

If yours doesn’t, then apps such as Moneyhub, Snoop and Emma can do it for you.

2. Know your goals

Each of us have different goals and things we want to save up for, or debts to pay off.

Keeping these in mind when thinking about your spending and saving means you have a better chance of reaching them.

3. “No spend” weekends

When an unexpected expense comes your way, like a car repair or faulty boiler, you might feel the pinch.

A no-spend weekend can be a great way to offset any overspending you’ve done. It involves going 48 hours without tapping any card or buying online.

It’s not necessarily about giving up things you enjoy doing, but rather an opportunity to get creative with ways to have fun for free.

This can also be a way of preparing for an expense, boosting your savings.

For an even bigger challenge, you could join the people making “no spend” months popular.

4. Be open about your money mission

Tell friends and family if you’re on a strict money diet so they can support you.

This tactic – also known as “loud budgeting” – can hopefully mean you won’t be embarrassed to opt out of expensive dinners out and any other pricey get-togethers.

You’ll have already made it clear that you’re keeping your spending to a minimum.

5. Seek help if you need it

Some restructuring of your borrowing might be enough to get you back in control.

But if this and some smart budgeting isn’t enough to resolve your money problems then don’t shy away from getting help.

Debt advice is best sought from a debt charity which will advise you, and act on your behalf, with nothing to pay for their services.

Getting help from a debt charity will have an immediate benefit as they can often negotiate freezing interest payments on some debts and get you some breathing space while you work out a plan for the road ahead.

Beware of debt help or loan consolidation companies that market their services heavily. They will often charge for advice and these fees will only serve to add to your existing debts.

Try the National Debtline (0808 808 4000), StepChange Debt Charity (0800 138 1111), or the Debt Advice Foundation (0800 043 40 50).