What is the 50/30/20 rule?
The rule says that you should spend 50% of your income, after you’ve paid tax, on your ‘needs’, 30% on your ‘wants’ and 20% on your financial goals. Let’s break that down.
How does the 50/30/20 rule work?
The rule says that you should spend 50% of your income, after you’ve paid tax, on your ‘needs’, 30% on your ‘wants’ and 20% on your financial goals. Let’s break that down.
Spend 50% on your needs
What do we mean by needs? These are the essentials of life. Things like your mortgage or rent, food, energy bills, travel, medicines. You get the idea. These are the things that we all have to spend money on. Ideally, you should spend half of your income on these needs.
Spend 30% on your wants
Wants are, well, things that we want. We could live without them if we really had to but life would be a lot duller if we did. Things like entertainment, fancy clothes, eating out, trips away. Ideally, you should keep your spending on wants to 30% of your income.
Spend 20% on your financial goals
What are your financial goals? You might want to save money for a car, a deposit on a home, or a holiday. Alternatively, you might use this money to reduce a debt or to build up a ‘rainy day’ fund for unexpected expenses.
How does the 50/30/20 rule work in practice?
Let’s say your pay is €1,000.
Spend 50% on your needs
You would spend €500 (50% of your income after tax) on your needs such as rent, bills, food, and transportation.
Spend 30% on your wants
You would set aside €300 (30%) for your wants. Things like nice clothes, trips, subscriptions, memberships etc.
Spend 20% on your financial goals
You make sure that the final €200 (20%) is put towards your financial goals – towards saving, reducing credit card debt etc.
Some things to consider
Are the percentages set in stone?
No. But they are a good guide. You can adjust the percentages to what works best for you at the time.
If you’re facing bigger bills than usual, you might have to spend more on your needs and less on your wants so a 60/20/20 split might work better. If you get some extra income, you might want to put it into savings so a 50/20/30 split might suit you
Is 50% for needs simply too low?
As costs for necessities keep rising, it might feel like it. Try to reduce the cost of your needs by shopping around for more competitive deals and cut back when you can for a while.
Dividing up your spending into ‘needs’, ‘wants’ and ‘financial goals’ while it might take a little time and effort gives you a greater understanding of where your money goes and more control. This is a skill that can last a lifetime
