The cost-of-living crisis is no longer news, with practically every household in the country having experienced some form of hardship resulting from ballooning costs. As recently as August 2023, 2.4 million households missed at least one essential bill payment – a damning statistic for a rich country. Through this crisis, households are being forced to reckon more directly with their own financial situation and to develop financial literacy skills at speed.
For households struggling with managing their money, there is one simple finance ‘hack’ that can make it much easier to structure spending, and that can help families shore up some savings for the future: the 50-30-20 rule. The 50-30-20 Rule sees household income split into three separate percentages, relating to ‘needs’, ‘wants’ and ‘savings’ respectively. But how does this hack work?
Identifying Your Needs
The first 50% of your household’s income is dedicated to your needs. This, naturally, encompasses essential bills and payments such as your rent or mortgage, your gas and electric bill, your internet connection, your water bill, your council tax, your insurance and any vehicle costs. It will also cover the essential costs inherent to your weekly shop, but only the essential costs (sweets and treats fall under ‘wants’, shortly). If any is left over, then it can be allocated as you wish – but the best course of action would be to save it.
Allocating Your Wants
Next, you can budget for your wants, constituting 30% of your monthly income. This 30% can be used as you please, on anything and everything: gym memberships, media subscriptions, leisure activities with family or friends, hobby crafts, etc. However, it is important to recognise that these are the first to go in the event of a financial crisis.
Sending to Savings
What remains, then, must be the 20% allocated towards your savings. This money should, in reality, be the first to leave your account each month. This is because it should be destined for some form of savings vehicle, apart from your day-to-day expenses and difficult to withdraw from. There are many kinds of savings vehicles for you to choose between, but the recommendation would be to find one with the highest rate of interest. This way, your money can generate more interest each month, working passively on your behalf.
Making the Most of Savings
In order to save effectively, you must first be free of debt. This is broadly speaking, of course – mortgages are a form of debt but do not apply here. Loans and overdrafts can cost a pretty penny in interest, and often more than any potential interest gains via a savings account. As such, taking the time to clear debt first gives you the most efficient way to generate interest.
Your 20% for savings should also come out of your current account immediately, without delay so as not to tempt yourself with additional ‘want’ spending. Automating the money to come out at the same time your income arrives is a great way to do this.
The 50-30-20 rule is not a panacea for dwindling finances, and can only do so much to help with regard to budgeting a household. However, the little help it does offer can in fact have big positive consequences.