Our relationship with saving can be a little complicated, to say the least. But with the necessity of building a financial cushion constantly increasing as the cost of living continues to rise, isn’t it about time that the UK breaks out of its bad spending habits?
According to data from the FCA, as much as 34% of UK adults had either no savings or less than £1,000 in their savings account. To quantify this, around 22.8 million people could be in danger should a rainy day occur or they need to make a one-off purchase.
Delving into the figures a little more, around 47% of 18 to 24-year-olds have less than £1,000 in their savings accounts. This calls for a more strategic approach to building a nest egg toward our financial goals, and the 50/30/20 rule could be the perfect strategy to improve the nation’s financial health.
The 50/30/20 rule is a simple metric that can transform how you approach saving money. Let’s take a deeper look at what it means, and how it can help to grow your wealth:
What is the 50/30/20 Rule?
The great thing about the 50/30/20 rule is that it can simplify the complexities of saving money each month. For an insight into how it works, take a look at your paycheck. If your taxes are withheld, subtract them from your total earnings. Don’t subtract other withheld or automatically deducted costs like health insurance or pension contributions, these will help to form your budget.
With your remaining salary, the 50/30/20 rule means that you put 50% of your earnings toward your needs, 30% toward wants, and the final 20% toward savings. This can help to create a mechanism where you’re saving a consistent amount of money each month in a way that can keep you feeling financially comfortable.
So, what are ‘needs’ and ‘wants’? Your needs are your essential outgoings like utility bills, your rent or mortgage payments, healthcare, groceries, petrol, and any other important non-negotiable costs that you need to pay.
Your wants, on the other hand, refer to non-essential outgoings like subscription services, takeaways, cinema trips, holidays, hobbies, and just about anything else that you can live without.
By allocating 50% to your needs and 30% to your wants each month, you’re left with 20% of your income that can be used for saving toward your future. Whether you choose to add to a rainy day pot, invest your money, or save for a one-off purchase is up to you, as long as it helps you to reach your financial goals.
50/30/20 in Action
As an example, let’s say you take home £1,800 after tax per month. If we’re applying the 50/30/20 rule to your salary, you will allocate £900 to your rent and other important expenses, and £540 to your non-essential expenses for the month, leaving £360 to help build your savings.
The 50/30/20 rule is a great way to save because its percentage-based structure means that you can easily adapt the rule to your circumstances.
Of course, not all of us have the luxury of allocating 50% of our salary to essential expenses. Rent in some cities can account for more than 50% of your earnings, and some of us may have medical expenses that make it more difficult to obey the 50/30/20 rule.
If your circumstances mean that your needs are higher than 50% of your earnings, it’s easy to adapt the 50/30/20 rule to a 60/25/15 rule, for example. The main goal is to build a positive routine for building your long-term savings.
Making 50/30/20 Work For You
The age of open banking is helping to make the 50/30/20 rule more effective to follow. Challenger banks like Revolut have introduced features to help improve financial management like ‘Pockets’ which can syphon your money to directly pay essential and non-essential bills while accurately managing your income each month.
Using a Bills Pocket, you can automatically pay your fixed expenses and set aside the amount you need monthly before forgetting about it. You can also create a Pocket for your wants, helping you to enjoy letting your hair down without having to worry about your spending.
Many platforms also work to automatically improve your access to savings, and this means you can save or invest your money accordingly without having to worry about the amount of money you’re putting away.
You can easily take advantage of tax-efficient saving strategies like an ISA or maximising your pension fund with your 20% allocated to growing your wealth, and this can help you diversify how you save your income.
Audit Your 50/30/20 Commitments
It’s important to avoid becoming financially uncomfortable when saving money, and if you feel like you’re struggling to meet your 50/30/20 commitments, there are a number of measures you can take.
Whether you choose to set up a ‘no-spend weekend’ once a month, change your supermarket to take advantage of more competitive prices or save as soon as you get paid, it’s important to continually audit your spending patterns to make sure that your outgoings aren’t stifling your savings.
Record Your Savings
It feels good to save, and recording your savings or money spent on debt repayments can be the perfect way to see the 50/30/20 strategy in action.
Remember, there’s no right or wrong way to build your savings, and you should always keep your financial goals in mind when it comes to managing your payday income.
We may be a nation that struggles to save, but the 50/30/20 rule is a great starting point that can help you build a significant nest egg for the future.
