50/30/20 Budget Plan: Everything you need to know

Introduction

It’s a new year, which means it’s a new you. At least regarding how you deal with your money. This year, we are aiming to be smarter and more prudent with our money. The frivolous spending habits of 2024 can’t be repeated in 2025. 

But we can’t just have the mindset. This is because managing money is very overwhelming. We must have a plan in action. That way, we have a guide to follow and stay accountable to. There are many different types of budgeting plans. But in this article, we are going to talk you through the 50/30/20 budgeting plan. 

This plan is a very effective and straightforward method. It divides your income into 3 categories: needs, wants, and savings/debt repayment. Overall, it creates a reasonable budget that is easy to stick to and will help you reach your financial targets. 

What is the 50/30/20 budgeting plan?

The 50/30/20 budget rule is a simple financial framework. It involved you dividing your after-income tax into 3 categories: 

• 50% for Needs: This includes essential expenses such as housing, utilities, groceries, transportation, and other related bills. 
• 30% for Wants: These are nonessential, more luxury spending. Things like hobbies, dining out, travelling, entertainment, and high-end shopping are included. 
• 20% for Savings/Debt Repayment: This is money that is set aside for savings, investments, or paying back loans or debt. 

Example:

If you earn £3,000 per month after taxes and deductions, the 50/30/20 rule would allocate 

• £1,500 for the Needs 
• £900 for the Wants 
• £600 for the savings 

But how do I implement it? 

Now that we know what the budget plan is, the next question we ask ourselves is how do we implement it? Well, let’s go through it step by step: 

1. Know your after-tax income.

That way you’ll be able to divide your income. Your after-tax income is your total income after deduction. This includes things like taxes, national insurance, insurance, and retirement contributions. Typically, employers will do this for you. But if you’re self-employed or your income changes every month, then calculate your average earnings. 

1. Keep tabs on your expenses.

Track your expenses and make sure that you understand your spending habits and stay within the allocated percentage. Additionally, tracking will help you discover whether your spending habits adhere to the 50-30-20 and allow you to make the necessary changes. This can easily be done on a spreadsheet or budgeting apps such as Chip, PocketGuard, and Money Budget. 

1. Identify what your critical cost is.

The costs I mentioned above are generalised examples. Everyone’s critical costs are different. So identify what yours are. For some, it’s mortgage or rent payments. For others it may be vital subscription payments. Utilities, groceries, transportation costs, etc., costs that are necessary for your daily life. This will take up the largest portion of your budget, so you must be mindful of this category. Additionally, everything included must be a necessity in order for you to remain committed to them. 

1. Make adjustments where necessary. 

If your expenses don’t work with the 50/30/20 framework, then make the adjustment. If, for example, your needs go over the 50%, then you need to rethink whether everything allocated there fits the category. Additionally, if you have a lot of debt to pay off, you may have to go over the 50% for some time until you’re in a stronger financial position. 

The importance of being consistent

Implementing the budget plan requires you to be consistent. Stick to your agreed rules, and resist the temptation to go over your percentage allocations. The plan can only be successful if you have clear guidelines that you stick to every month. So be responsible, and don’t exceed your limits. Remember, if you do, you’re only cheating yourself. 

Benefits of the 50-30-20 Budget Rule 

We have emphasised how effective and useful the 50/30/20 rule is. But we haven’t explained the ways in which it is. Let’s go over the benefits: 

• Simple to Implement: The rule is straightforward and easy to apply. There’s no need for complicated calculations and can be implemented by anyone, regardless of income. 
• Effective tool for better money management: Helps to manage your money in a balanced way. Through this rule, you can ensure that your necessary costs are covered, your debts are being paid, and you still have money to have fun. 
• Instills financial responsibility: By prioritising the necessary costs and handling the fundamental needs. Ensures a healthy balance that allows you to be aware of your priorities and makes sure your essentials are met. 
• Saving Goals: It’s always important to have savings. It boosts your credit score and prepares you for retirement, paying off debt, investment, or pursuing ventures. This method makes you accountable to have such funds set aside. It also allows you to prioritise your financial future and give yourself some security for the future. 

Conclusion

So to any of our readers who are looking to start budgeting but don’t know where to start, we hope our guide on the 50/30/20 rule was useful. Not only is it straightforward and simple to use, but it creates responsibility. So say goodbye to bad spending habits, because with this budget plan, all your 2025 financial goals are bound to be met!

Thank you for reading, click the link to read more of our Finance Articles