When you first start saving money, it can be daunting to work out how much you should be aiming to put away. Saving for the future is important, but it’s equally important to make sure you aren’t depriving yourself in your day-to-day life.

One solution that some savers find helpful is the 50/30/20 approach to saving. In this article, we will be covering some key points about the 50/30/20 method, including:

• What Is The 50/30/20 Rule?

• What Are The Advantages Of The 50/30/20 Rule?

• What Are The Weaknesses Of The 50/30/20 Rule?

At the end of this article, you will have a better understanding of the 50/30/20 rule and whether or not it’s a useful tool for helping you build your budget.

What is the 50/30/20 Rule?

The 50/30/20 rule is a popular tool for helping individuals and families build a budget, especially when they are just starting on their financial journey.

The 50/30/20 rule teaches savers to think of their budget as three separate pots: needs, wants, and savings.

The rule suggests that around 50% of your take-home (post-tax) salary should be spent on things you absolutely need: rent, utilities, phone bills, food shopping, and any other regular expense that is absolutely critical for living.

Next is wants. The 50/30/20 rule advocates spending 30% of your salary on expenses that might not be total necessities, but are things you enjoy and that bring value to your life. This category includes things like your Netflix subscription, gym membership, or media subscriptions (e.g. books or newspapers).

Finally comes savings. The 50/30/20 rule suggests allocating 20% of your monthly budget to savings or paying down any debt you may have. This could be a great way to get into the habit of saving, and may provide a realistic way to tackle debt.

What Are The Advantages Of The 50/30/20 Rule?

The 50/30/20 rule comes with a variety of advantages that might appeal to savers, including:

Simplicity

By breaking down your budget into 3 easy-to-understand categories, the 50/30/20 rule makes saving and spending straightforward. It provides a broad blueprint for budgeting, and this simple approach may be particularly appealing to new savers or those who aren’t very experienced with budgeting.

Discretionary Spending

Although saving money is a great habit and a powerful tool, it can be easy to focus too much on saving and neglect rewarding yourself for your hard work.

Sometimes, when you’ve worked hard for your money and you are working hard to save, you might feel guilty about spending money on things that seem frivolous, like going to the cinema or buying a fancy coffee from your favourite coffee shop. The 50/30/20 budget provides a framework for these little luxuries, allowing you to balance spending with enjoying yourself.

Setting Realistic Goals

The 50/30/20 rule encourages savers to set realistic budgets and savings goals.

Because the 50/30/20 rule is linked to your take-home pay, this system encourages you to understand exactly how much you have coming in and how many expenses you pay. Since you already know that 20% of your income will go into savings or paying off debt, this allows you to project how much you can save in the future, giving you a realistic idea of how much money you will have in a year or more.

What Are The Disadvantages Of The 50/30/20 Rule?

Although the 50/30/20 rule could be a straightforward way to begin your savings journey, there are a few potential drawbacks, especially for anyone who is already used to saving.

Overly Simple

One potential drawback of the 50/30/20 rule is that it is almost too simple.

The rule assumes that someone earning £100,000 a year and someone earning £30,000 should be following the same savings process. Obviously, the person with the higher income will save more at 20%, but it seems likely they could reduce their ‘needs’ to below 50% of their outgoings and add the additional amount to their savings instead.

A Lack Of Defined Goals

While it can be useful on payday when the money hits your account, the 50/30/20 rule doesn’t provide any specific goals to achieve. This might make it harder for some savers to motivate themselves, as they don’t have a clear end or reward in sight.

This means the 50/30/20 rule also isn’t encouraging you to consider your savings goals; whether you're saving for a new house or car, retirement, or a luxury holiday, you should have a clear goal in mind when putting money away.

A Focus On Wants

Although this point may be less popular, it could be argued that allocating 30% of your income to what you want is too high, and that saving or investing would be a better long-term use for the money.

Much like the previous point, a lack of defined goals means that you can end up spending more than you mean to on unnecessary expenses like subscriptions or luxury items that you don’t necessarily need, and this means it could take longer to build up your savings.

However, part of the reason that the 50/30/20 rule is popular is precisely that it takes all the small things in your life into account. Some savers might find it hard to commit to a rigid savings strategy and end up giving up because they can’t enjoy the money they've saved.

In this case, a compromise might be possible. Consider which of your wants are the most important to you, and try to reduce your spending on the 2 or 3 costs that add the least value. This could reduce your ‘want’ budget below 30% without depriving you of all the small things that make life worth living.

Explore a Range of Saving Products with Sheffield Mutual

At Sheffield Mutual, we work hard to provide our members with a range of savings options to help them reach their savings goals.

Explore our range of products, including our Regular Premium Investment ISA, Single Premium Investment ISA, Single Premium Sustainable ISA, Regular Premium Sustainable ISA, as well as our Investment Junior ISA and Sustainable Junior ISA.

Our range also includes a variety of bonds, such as our Three Year Fixed Bond, Investment Bond and Income Bond, as well as products like our Tax Exempt Savings Plan, exclusive to friendly societies like Sheffield Mutual.

For members who are looking to start saving regularly, consider our Regular Savings products, like our Regular Savings Plan, and see how saving regularly can help your money grow.

If you aren’t sure which of our products is right for you, consider using our helpful product selector or contact us to speak to a member of our friendly, helpful team about becoming a member of Sheffield Mutual.

This article provides generic information and the writer's opinions and should not be relied upon for investment decisions. Sheffield Mutual has provided no advice. If you doubt whether a savings or investment plan suits you, consider contacting a financial adviser for advice. If you do not have a financial adviser, you can get details of local financial advisers by visiting www.unbiased.co.uk or www.vouchedfor.co.uk. Advisers may charge for providing such advice and should confirm any costs beforehand.