Would you like to become a budgeting ace but feel like you struggle with your finances?
Amongst the many apps or methods you already tried and immediately gave up on, the 50/30/20 rule is by far the most sustainable and efficient route to managing your finances effectively. The rule helps you draw a picture of your overall pay streams and separate them into clusters.
Categorising your transactions will provide you with more reliable insights into your spending habits and a breakdown of fixed, variable or redundant expenses.
What is the 50/30/20 rule?
The 50/30/20 rule is a straightforward budgeting method that allocates your take-home income to three categories: needs, wants and savings. According to the rule, you should use 50% of your income for needs, 30% for wants and 20% for savings.
50% to cover your needs
Needs are those expenses you could not live without and therefore these costs make up the majority of your budget. For example, if you make £1,600 a month, £800 will go into this pot. In this category, you’ll find items such as rent, bills, transportation, basic groceries, and all the other essentials for your everyday life.
Should this not be enough to cover your needs, you’ll have to consider adjusting your costs as you go, especially with the latest increase in energy prices and the steep inflation. Sometimes you could be paying for an unnecessary phone plan you are not entirely using or expensive insurance that does not provide much coverage when instead you could opt for cheaper, more affordable solutions.
30% to cover your wants
Once your essentials have been taken care of, you are allowed to use 30% of your income on less necessary expenses, known as wants. Wants cover a wide range of items such as clothing, dining out, holidays, and all those extras that complement your needs and elevate your lifestyle. From the previous example, £480 out of your £1,600 salary will be your monthly share for this category.
You can always maximise your wants by asking yourself if you really need that particular item/s and if it’s worth 30% of your income or by identifying areas where you’re overspending and trying to cut back.
20% to cover your savings
Your last budgeting category is savings which are going to become your long term funds and drive you towards financial stability. With 50% going into needs and 30% into wants, 20% of your income will be used for savings. Not only do savings include funds you set aside for your summer holidays, that trip to South America you’ve been looking forward to for 3 years, that music festival you’re craving to attend or your emergency stash, but also finances you need in order to repay future interest on any existing debt.
20% of your £1,600 salary means you can save £320 monthly, adding up to £3,840 in a year! If you consistently save 20% off of your monthly income, you’ll quickly build a significant fund that will bolster your financial stability goals.
What if you’re on a variable salary?
Undoubtedly it is easier to test the 50/30/20 rule when you’re on a stable salary and fully aware of your money flows than when you’re working gigs, scattered jobs or by the hour. Inconsistent earnings give less chance to allocate the same monthly amount to each category, making your budgeting process unreliable and much more challenging.
As a result, your working circumstances will heavily affect your ability to stay on top of your spending on needs, wants and savings.
SteadyPay can help you budget
SteadyPay’s TopUp service helps you secure a fixed income, whether you are paid weekly, bi-weekly, monthly or per job, therefore boosting your budgeting ability.
Our system calculates your pay by analysing your latest income streams and working out an average. When your income goes below that average, we pay you the difference between your last pay and your usual earnings (within your affordability). Once your expenses and income become stable, you’ll be able to establish a long-term financial plan that pays your living costs and lets you save and enjoy your money at the same time.
Are you ready to start budgeting like a pro? Sign up to SteadyPay now and follow the 50/30/20 rule.