Adjusting the 50/30/20 budget rule could be a game-changer for UK households
The 50/30/20 budgeting rule is considered one of the most effective budgeting methods to cut down on non-essential spending, but it may seem unattainable for those who are spending more than 50 percent of their income on essential expenses.
The highly-regarded 50/30/20 budgeting strategy may seem out of reach for households spending over half their income on essential expenses, but a single key adjustment could make it all work.
The 50/30/20 rule is lauded as one of the top budgeting methods to curb non-essential spending and is also considered one of the easiest to stick to for most people. However, numerous households across the country may mistakenly think that it's impossible to apply this budget to their expenses.
This method centres on allocating 50 percent of your post-tax income towards necessary expenses and bills such as rent and utilities, 30 percent towards wants, and the final 20 percent towards savings each month. For many, this ratio provides the perfect balance between saving and spending, offering immediate gratification without jeopardising future financial goals.
In the midst of the cost of living crisis, many households may find they are already spending more than 50 percent of their income on daily life necessities. But this doesn't mean they have to abandon the method entirely, as the ratios can be adjusted provided all three sections are still included.
For example, if a household spends 60 percent of their income on needs, they can maintain the 30 percent for wants and allocate 10 percent towards savings. This can also be adjusted based on your priorities, reports the Mirror.
If someone spends 60 percent on needs but has a goal of saving more, they may allocate the 30 percent towards savings and reserve the 10 percent for their wants.
Those burdened with debt can also use the savings portion to clear their debts first before building up their nest eggs, which might require more than the initial 20 percent ratio. Deciding how much to allocate to each segment from the start necessitates a comprehensive review of your overall financial situation.
This can be achieved by individuals manually reviewing their monthly bank and credit card statements to determine how much they are currently allocating towards their needs, wants, and savings or debt repayments. This will assist them in understanding how they can transition into this budgeting method.
Some budgeting apps may also automatically categorise their spending.
Needs usually include essential monthly and daily expenses such as rent, groceries, transport, childcare, insurance, minimum loan payments, and utilities. Wants, on the other hand, are non-essential expenditures that many may find themselves needing to cut back on to achieve the 30 percent target.
These could include dining out, clothing, club memberships, hobbies, and travel.