The 50/30/20 rule is a simple way of managing your money, after tax, by setting aside:
50% of your take home income for needs
30% of your take home income for wants
20% of your take home income for savings.
Needs include your rent or mortgage payments, gas and electricity, refuse collection, transport, medicines and health insurance. It also includes minimum debt repayment but it doesn't include things like subscriptions to online entertainment, spending on takeaway coffees and juices or eating out. Needs are the basics of life.
A lot of our plans might be on hold at the moment as a result of Covid-19 is and we may be tempted to spend a little excessively, in general, wants include the good stuff. All the things you spend money on that are not essential. In normal circumstances, this includes things like eating out, entertainment, hobbies, fashion items as well as bigger ticket items like holidays, concert tickets and the latest smartphone or tablet. It's perhaps no surprise that this is the category that we all tend to overspend in.
Saving money is more important than ever, especially for those that may have suffered a reduction in income at household level. In normal times, savings can include repaying debts beyond just minimum repayments, saving money for emergencies and saving for your retirement. These are the sensible things that we all should be setting aside money for. Unfortunately, we tend not to save 20% of our take home income or to save at all.
Applying the 50/30/20 rule
So if your after tax income is €/£2,400 a month, according to the 50/30/20 rule, you should try to limit your needs to €/£1,200, you can spend €/£720 on your wants and you have €/£480 left over for saving or repaying debts.
Getting your spending in line with the 50/30/20 rule
If your household has suffered a loss of income, the 50:30:20 rule may need to be adjusted.
If your needs exceed 50%, you might have to do without a few wants for a bit and use some of that money for your needs until you can get your needs down to a more manageable level.
If your spending on your wants is way north of 30% then you need to take a look at where your money is going and reign in your spending.
If your savings are much lower than 20% because of debt repayments then you might want to look at strategies for reducing your debts.