50-30-20 rule in budgeting

Getting into the habit of budgeting each month has many great benefits as it will encourage you to manage your money better and save a bit more each month. You can then use the funds you saved up for an emergency, rainy day, or for a specific goal like a holiday, home improvements or for your children’s education.

We have lots of handy tips and tools to help you get into the habit of saving. When it comes to budgeting, we have a useful budget calculator that will help you to work out what your monthly income and expenses are and how much you have available to save. This budget calculator will also encourage you to consider areas where cost savings can be made and will motivate you to spend less and save more.

Another simple way to get started with savings is to plan your household budget. Looking at your monthly expenditures, are there areas where you could reduce your outgoings? Our annual budget spreadsheet can help you to manage your income and expenses and budget better. Knowing how much you are spending each month will help you plan more effectively for events throughout the year and will highlight where improvements can be made.

Whatever you decide to use the money you have saved for, we have lots of information, such as this budgeting blog that will help get you started on your savings journey.

What is the 50/30/20 rule in budgeting? 

The 50/30/20 budgeting rule is a simple and practical way of budgeting and saving more effectively. It works by assigning 50% of your net income towards necessities such as your household outgoings, mortgage, rent, food, utilities, health insurance, and other expenses that are essential.

Then, 30% of your net income goes towards non-essentials that improve your quality of life, such as dining out, entertainment, gym membership, and other discretionary expenses. And 20% of your net income is for savings, an emergency fund and debt repayments. These include payments on debt such as credit cards, student loans, your pension contributions and an emergency or rainy-day fund.

The 50/30/20 rule can be a good starting point if you are new to budgeting because it's simple, easy to remember, and encourages saving. However, it's just a guideline and may not work perfectly for everyone so it's important to adjust these percentages based on your individual needs and goals.

50% - Spending 50% on your needs 

To get started with the 50/30/20 budgeting system, firstly look at your overall income and then add up all your essential outgoings. As mentioned above, your essential outgoings are for things that you have to spend money on in life such as a mortgage or rent, food and utility bills.

When you are adding up all of your expenses you will need to make sure they fit within the 50% allocation of your income. If you go over the 50% allocation, can you find some items you could cut back on? If you are not spending 50% of your income on essential items, that’s great news and you can put the surplus into your savings or your 30% or 20% allocation.

30% - Spending 30% on your wants 

Once you have looked at your essential expenses (50%) now it’s time to look at your non-essential spending (30%). Again, look at all your spending on non-essential items and see what they add up to. In theory it should amount to no more than 30% of your overall income.

While it might be difficult to cut back on essential spending, it might be easier to make adjustments to your discretionary expenses.

For example, eating out can be much more expensive than cooking at home so could you try to limit how often you dine out, and consider meal planning to save on food shopping bills?

Review all your subscriptions to streaming services. If you're not using them regularly, it might be time to cancel some of them. If you have a costly gym membership, could you consider exercising at home?

Review your phone and internet services to see if you can downgrade or switch to another provider for a cheaper service offering. Equally, small changes like turning off lights when you're not in a room, taking shorter showers, and adjusting your thermostat can add up to big savings over time.

If feasible, use public transport instead of owning a car. It can help you save on fuel, maintenance, and insurance costs. And try to shop smartly. Look for sales, use coupons, and consider buying second-hand when possible and stick to a shopping list to avoid impulse purchases.

20% - Spending 20% on your financial goals 

When you have added up 50% and 30% of your expenditure you should have 20% left over. This budgeting exercise will help you clearly see your incomings and outgoings and will show you that 20% of your incomings can be used for savings and for an emergency fund.

Once you know how much you have left over to save, it’s a good idea to have a savings objective in mind as this will motivate you to keep on track to achieve your goal.

Deciding what your financial goals should be will depend on each individual. If you are not sure what you want to save for but just know that you want to start saving, maybe you could draw up a 'wish list' of the things or experiences you would like to be able to afford. Now prioritise that list because you can't do everything at once.

Perhaps you'd like to buy a house or new car? Maybe you're planning the holiday of a lifetime or your dream wedding. You could be saving for a rainy day, your children's education, or your retirement. Whatever is top of your list is the savings goal you should aim for.

This article gives examples of short, medium and long-term saving goals and provides a step-by-step guide to help you set realistic financial objectives. Another useful resource is this guide to sinking funds which could be helpful when setting money aside for large expenses.

Now that you have decided to save you might be wondering how to get started and how to get your savings working harder for you.

We have created a step-by-step guide for beginner investors to help you navigate the decisions you need to make to start investing. This guide will help you understand what investing means and the options available to you.

How to distribute money as per the 50/30/20 rule 

As mentioned, the 50/30/20 rule is a simple, practical, easy way to budget. Here's how you can distribute your money according to this rule:

1. Work out your net income: Calculate your income after tax has been deducted. If you are an employee, your monthly paycheck should detail your net income after tax and deductions for things like a pension and health insurance. If you are a freelance worker or have more than one source of income, your income after tax will be what you have left once you set aside money for your taxes and any other business expenses.
2. Split your money three ways: Split all your expenses into the three categories: needs, wants and savings. As mentioned, a need is anything that is essential, a want is things you like in your life but which you could live without, and savings are money you have left over for emergency funds and savings. Use our budget calculator to help with the split.
3. Review and adjust your spending: Once you have a clear view of your spending you will be able to see how much of your overall income you are using for your needs, wants and savings each month. With this information you can then adjust your budget to fit the 50/30/20 rule. Cutting back on your needs might not be possible but it is likely you could cut back on your wants. The more you can cut back on nice-to-have items the more likely you will be able to meet your 20% savings goal. This calculator is a handy tool you can use to spilt your income into needs, wants and savings and will show you how you should be budgeting your income based on the 50/30/20 rule.

Example of 50/30/20 rule 

Lisa’s income each month after tax is €3,000. If she follows the 50/30/20 rule, then this is what her monthly expenses might look like:

50% - Needs

30% - Wants

20% - Savings

Saving options

Now that you have an idea of how much you can save each month using the 50/30/20 rule, it’s time to consider your saving options. You’ll find some useful savings tips here.

Saving with Zurich is one option. Investing your savings with Zurich in a regular savings fund can help you achieve your savings goals. With our Regular Savings plan, you can save from as little as €100 per month and potentially grow your investment. Investing a lump sum is a great option if you want an opportunity to grow your money over time. We offer access to funds with varying levels of risk and return, so why not check out how investments work and how to get started.

In this article we have talked about managing your expenses and incomes using the 50/30/20 budgeting rule. We have also provided you with lots of resources and you may need to plan your budget and start saving. 

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This publication has been prepared for general guidance on matters of interest only and does not constitute professional advice. You should not act upon information contained in this publication without obtaining specific professional advice.