Budgeting rules to save over £3500 a year

Managing your finances can often feel overwhelming, especially with so many expenses to overcome. However, one budgeting method stands out for its simplicity and effectiveness—the 50/30/20 rule. Whether you’re new to budgeting or looking for a way to manage your income, this approach can help you balance your spending, by prioritising your savings, and still enjoy life. In this article, we will break down the 50/30/20 rule and how you can apply it to your own financial situation.

What is the 50/30/20 Budget Rule?

The 50/30/20 budget is a straightforward method for dividing your monthly net income (understand difference between gross and net salary) into three key categories:

• 50% for Needs
• 30% for Wants
• 20% for Savings

This rule provides a clear structure for managing your finances and helps you maintain a balance between essential expenses, non-essential, and future financial planning.

Let’s describe what is normally going on each of the categories:

50% for Needs

The first and largest portion of your budget—50%—is allocated to your needs. Needs are essential expenses that are necessary for your day-to-day life. These are the costs that you must pay every month to ensure you have a roof over your head, food on the table, and utilities functioning. Without these, your basic lifestyle would be difficult to sustain.

Common needs include:

• Mortgage or Rent Payments: Typically your largest monthly expense.
• Groceries: Basic food items, such as bread, milk, vegetables, and fruit.
• Utilities: Gas, electricity, water, and any necessary home maintenance.
• Insurance: Essential coverage, such as car insurance, home insurance, or life insurance.
• Minimum Loan Repayments: The minimum payments for credit cards, loans, or other debts.
• Transportation: This includes commuting costs like public transport or gas for your vehicle.
• Childcare or Maintenance Fees: Any child support or pet-related care.

By allocating half of your monthly income to these essential expenses, you ensure that your basic lifestyle and obligations are taken care of.

30% for Wants

The second portion of the 50/30/20 budget—30%—goes towards wants. While needs are unavoidable, wants are non-essential items or experiences that enhance your life but aren’t necessary for survival. These are the areas where you can afford a little indulgence while still keeping your budget in check.

Examples of wants include:

• Dining Out: Meals at restaurants, cafes, or takeaways.
• Subscriptions: Entertainment services like Netflix, Spotify, or gym.
• Travel and Holidays: Holiday plans or weekend getaways.
• Leisure Activities: Gigs, festivals, sporting events, or shopping for non-essential items.

This category is all about enjoying life without going overboard. By setting a clear limit (30%) on your wants, you can have fun while also maintaining control over your spending.

20% for Savings

The final portion of your budget—20%—is dedicated to savings. This is the money you set aside for your future, whether it’s for a rainy day, retirement, or long-term financial goals. Saving is crucial for building financial security and ensuring you’re prepared for unexpected expenses or opportunities.

You can use your savings in several ways:

• Building an Emergency Fund: Saving for unexpected expenses, such as car repairs or home maintenance.
• Paying off Debt: Making extra repayments on your credit cards or loans to reduce interest and get out of debt faster.
• Investing: Contributing to tax-efficient savings accounts like ISAs or investing in stocks and shares. We usually do stocks analysis on investment section if you wish to have a look.
• Saving for Large Purchases: Whether it’s a down payment for a house, saving for a wedding, or putting money aside for a new car.
• Contributing to a Pension: Saving for your retirement ensures you can enjoy your later years without financial stress.

This 20% can give you peace of mind knowing you’re preparing for the future while still living comfortably in the present.

How to Use the 50/30/20 Rule Effectively

To use the 50/30/20 rule effectively, start by identifying your total monthly income after tax. Once you have that figure, break it down into the three categories:

1. Identify Your Needs: List all your essential expenses for the month (rent, groceries, utilities, insurance, etc.) and add them up. Allocate 50% of your income to cover these.
2. Allocate Money for Wants: Review your discretionary spending (like eating out, subscriptions, entertainment) and ensure it doesn’t exceed 30% of your income.
3. Set Aside for Savings: Finally, make sure that 20% of your income is put into savings or debt repayments. This will secure your financial future.

Example of a 50/30/20 Budget Breakdown

According to the latest report from the Office of National Statistics, the gross median weekly earning in the UK for employees in the year 2024 is £728.30 which converted to annual salary (£728.30 x 52 weeks in a year) is £37,831.60 (a net salary of £30,758.55). However, calculating this ‘gross median’ includes everyone’s salaries. This includes the super rich. As a result, this number is much bigger than what the majority of the population earns. Because of this, we will do the math to fit the minimum for most people. We assume this budget rule is made for a full-time worker earning the National Minimum Wage. This is currently £11.44/hour. To be considered full time, you need to work 30+ hours a week. Based on the 30 hours, it will make an annual gross salary of £17,846.40, equivalent to a net salary of £16,369.01.

Here’s a breakdown of the 50/30/20 rule for various monthly incomes including the median net earning in the UK (£30,758.55) and also the minimum net earnings for a full time employee (£17,846.40):

As shown in the table, regardless of your income, the 50/30/20 rule provides a consistent framework to allocate your funds responsibly.

Why the 50/30/20 Budget Is So Effective

The 50/30/20 rule is one of the most popular and effective budgeting methods because of its simplicity. Unlike more complex budgeting methods, it only requires you to track three categories. This makes it easier to maintain and less stressful to manage. The 50% portion for needs ensures that your essentials are always covered, while the 30% for wants lets you enjoy life without guilt. Most importantly, the 20% for savings helps you build a secure financial future.