What is the 50/30/20 budget rule and how can it help repay debts?

There are many ways to budget your money and repay what you owe. Some can seem complicated while others are more straightforward, like the 50/30/20 rule. So, what does this method involve, and would it suit you?

How the 50/30/20 rule works

The 50/30/20 rule is a way to split your income into separate pots that each pay for different things. These are your ‘needs’, your ‘wants’, and your ‘repayments and savings’. 

• The ‘Need’ pot: 50% of your money is set aside for your essential expenses. These include things like your rent or mortgage, household bills, groceries and transport.
• The ‘Want’ pot: 30% of your money goes towards things you want but aren’t essential. This includes luxuries like takeaways or meals out, holidays, subscriptions, and gifts. Try to be strict with yourself when dividing up your wants and your needs. For example, some new clothes may be essential, but they won’t all be!
• The ‘Savings and Repayments’ pot: 20% of your income is set aside for savings, repaying the money you owe on any loans and credit cards, or a bit of both. This pot doesn’t include repayments for secured borrowing linked to your essentials, such as a mortgage on your house, or a finance agreement on your car. They can be included in your ‘need’ pot.

Here’s an example of how the 50/30/20 rule would work if you’re earning £2,000 after tax:

• £1,000 will go towards bills and essentials
• £600 can be spent on little luxuries and other things you want
• £400 will go towards savings, repaying debts, or both

If you’re self-employed and your income changes from month to month, you can estimate how much money you’ve put towards each of your pots by using the average of your last three months’ income. If you don’t know what this is off the top of your head, then you can use your bank statements or accounting software to help.

Is the 50/30/20 method right for me?

There are plenty of advantages to using the 50/30/20 rule to organise your money. It can help you to: 

• Pay your debt off faster - If your savings and repayments pot is more than enough to cover your minimum payments, you could pay a bit more off your debts each month to clear your balances quicker and reduce the amount of interest you pay overall.
• Save more - If you have money left over in your savings and repayments pot once all your debts are covered, you could save this. Perhaps you could build a rainy day fund, save up for something specific, or put it towards your retirement.
• Enjoy a few treats - Knowing that your essentials, your savings, and your debt repayments are taken care of by your needs and your savings and repayments pots, you can spend your wants pot without worrying that this money is needed elsewhere.

When might this method not work?

On paper, the 50/30/20 rule may sound like a good idea, but it doesn’t always work for everyone. You might find it doesn’t work for you if: 

• Your pots don’t add up - If your essential expenses come to more than 50% of your income assigned to your needs pot. This doesn’t mean you can’t use this rule at all, you just might need to tweak the percentages going into each pot. Maybe your split is more like 70% for needs, 20% for savings and repayments,and 10% for wants, and that’s okay!
• You prefer a detailed budget – While the 50/30/20 rule splits your money into expense types, some people prefer even more detail in their budgets. If you’re one of these people, you might find that a different system works better for you.
• Your income is too varied - If your income varies from month to month, such as if you’re self-employed or depend on commission or overtime, then you may not be able to create an accurate baseline to organise your finances around.
• You need to save more - Perhaps you’re saving for a house deposit or want to put more away towards your retirement. Again, this doesn’t mean you can’t use this rule at all, you just might need to tweak the percentages. You could flip your wants and pots, so you set 30% of your income aside for the latter. And there’s nothing stopping you from adjusting the splits even further, perhaps allowing for an even greater portion of your income for savings. It’s up to you!
• It leads to waste - Under the 50/30/20 rule, you may find yourself tempted to spend simply because you can. But remember, there’s no pressure to spend right up to the limits of your pots if you don’t need or want to! For example, if you find you only spend half the money assigned to your wants pot one month, you could use it to top up your savings, or pay a bit extra off your debts.

Keep monitoring and get help

Just because you’re using the 50/30/20 budgeting method doesn’t mean you don’t still need to keep an eye on your accounts. Particularly when you first start using a budgeting method like this, or if your salary changes, it’s sensible to regularly monitor your income and spending to ensure everything is working out. After all, what good is it if you run out of money in your needs pot before all your essentials are paid for?

If the 50/30/20 rule isn’t right for you, then there are plenty of other ways to budget, like jam-jar budgeting or zero-based budgeting, that might suit you better. But if you find that you can’t cover your essential spending and financial commitments no matter how you slice your budget, then it may be worth seeking further guidance. The online information and advice from MoneyHelper is a great place to start, and you can also speak to expert advisers at StepChange for impartial advice on dealing with debt.  

Read on to find out which is the best way to pay off debt - the snowball or avalanche method?