Everyone’s financial situation is different, meaning everyone’s saving goals will be different.
While some might send regular instalments into an ISA each month, others may be a bit more ad-hoc, depending on what they can afford.
If saving a little bit more of your paycheck is your goal, but you’re unsure of the best way to start, then the 50/30/20 rule is for you.
This is a tried, tested and proven technique that allows you to start regularly saving each month.
Here’s a closer look at how it works…
What is the 50/30/20 rule?
The 50/30/20 rule helps keep spending on non-essentials within an allocated budget each month.
Essentially, the rule involves dividing your spending into three categories: needs, wants and savings.
Then, with each paycheck, allocate 50% to needs, 30% for wants and 20% for savings or debt repayments.
The 50/30/20 rule explained:
Needs – 50% of total salary
Needs include essential living costs such as rent or mortgage payments, bills, food and transport to and from work or the school run.
Wants – 30% of total salary
Wants are non-essential costs, such as shopping, eating out, gym memberships, subscriptions, trips away and nights out.
Savings or debt repayments – 20% of total salary
The final 20% of your savings should then go towards paying off debt beyond minimum payments or putting money into a savings account, investment, or pension fund.
Source: HSBC
For example, if your monthly income is £1,500 after tax, you might spend approximately £750 on needs, £450 on wants and £300 on savings or debt repayment.
Separating your money into pots like this is a failsafe budgeting technique.
Ed Fleming is the managing director at Savoo, a voucher code provider that donates to charity with every voucher used. He says: ‘When a lump sum comes into your account, it is easy to get carried away.
‘Putting it straight into different money pots or waiting until the month’s rent and bills have been subtracted makes it much easier to see exactly how much you have to play with.
‘Then, around halfway into the month, it’s easier to see how much you have for the remaining weeks to enjoy things like meals out, trips and hobbies.
‘You can then use tools like discount code sites, comparison sites, and clearance offers to reduce and help your money go much further.’
What if the 50/30/20 method doesn’t work for me?
Finances are very personal, so budgeting rules will never be a one-size-fits-all method.
For some, 50% of their paycheck may not be enough to cover all essential costs, while 30% may be more than they tend to spend on unessential things like gyms and subscriptions.
If this is the case, try splitting your money in a way that suits your specific costs. Maybe that’s more like 60/20/20 or 70/20/10.
Either way, it’s a good way to ensure you don’t spend too much on things you don’t really need, especially if you’re trying to save.
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