What do you think of the 50/30/20 principle

toby3210

Hi there,

New year, new financial start! What does everyone think of the 50/30/20 approach to finances. The premise is that you should spend no more than 50% of your net income on essentials (e.g. housing), no more than 30% on non-essentials (e.g. holidays, eating out, gym membership) and minimum of 20% on your future with 10% on savings and 10% on investments.

It would be great to learn if anyone else uses something like this and what things I may need to be wary of. 

EssexExile

It really depends what your net income is. When I first got married it all went on essentials, no holidays, no eating out.  Then life improves, income increases and eventually essentials are only a small part of the total.

I still don't spend any of it on a gym membership though.

CliveOfIndia

EssexExile said:

It really depends what your net income is. When I first got married it all went on essentials, no holidays, no eating out.  Then life improves, income increases and eventually essentials are only a small part of the total.

I still don't spend any of it on a gym membership though.

Couldn't agree more.

Like yourself, way back when I hardly ever went on holiday - when I did, it was just a few days away camping.  Pretty much everything I earned went on essentials.

It also depends on your priorities.  Lots of my neighbours drive very new, very expensive cars.  I could probably afford to do the same if I wanted, but to me I'm happy with my 15 year old, reliable old banger - I'd prefer to spend more on other stuff, such as trips to the theatre, a holiday once a year (still nothing outrageously expensive, but just to get away), days out, etc.  Some people may prefer to go all-out on expensive holidays to exotic locations, some spend a lot on good food and fine wine - each to their own, it's all down to personal preference.

I don't think anyone would argue against putting aside a reasonable sum into savings, if you can afford it - you never know what lies around the corner.

Retirement is the other thing to consider.  Both my parents and my in-laws lived "comfortably but fairly frugally" during their working lives, saved hard, and have enjoyed very comfortable retirements as a result - no money worries at all, nice holidays every year (often more than one), plenty of spare cash to do pretty much whatever they want within reason.  Yes, this comes at a cost during your working life, and it's a bit of a bu&&er if you go and shuffle off this mortal coil just a couple of years into retirement, but it's one more thing to consider.

Zanderman

Sorry OP, have never ever used anything like that!

Like the other replies everything in my family's life has been dependent on levels of income, not on what proportion of it goes on what.  

And personally I don't think I've ever been in a situation where I felt I could spend 30% on non-essentials like going out, holidays and gyms!

Maybe I've just never earned enough!  But basically patterns of spend must reflect what your income level actually is, not on proportions, and on you want to do now (those non-essential wants will vary immensely from person to person) and what you want (again will vary a lot, especially savings and pensions) in the future. I really doubt one formula fits all!

Jami74

toby3210 said:

Hi there,

New year, new financial start! What does everyone think of the 50/30/20 approach to finances. The premise is that you should spend no more than 50% of your net income on essentials (e.g. housing), no more than 30% on non-essentials (e.g. holidays, eating out, gym membership) and minimum of 20% on your future with 10% on savings and 10% on investments.

It would be great to learn if anyone else uses something like this and what things I may need to be wary of. 

I would absolutely love if 50% of my income covered essentials. Probably works for young people in their first job still living with parents. Or high earners.

DasTechniker

EssexExile said:

It really depends what your net income is. When I first got married it all went on essentials, no holidays, no eating out.  Then life improves, income increases and eventually essentials are only a small part of the total.

I still don't spend any of it on a gym membership though.

As above. When I got married many years ago, all our income just covered the mortgage and food. Anything else was a luxury. But life does improve and we can now spoil our grandkids. 😊

RedLipstick

I don't follow the 50/30/20 method as it's very difficult in a HCOL (tried in the past but failed), though a while ago I have read somewhere that 40% is a very decent saving rate and for few months I now keep a note of what 40% of my income is to use as a guidance for the month. Hardly ever hit the target but I try to be as close to that as possible.

gsmh

CliveOfIndia said:

Retirement is the other thing to consider.  Both my parents and my in-laws lived "comfortably but fairly frugally" during their working lives, saved hard, and have enjoyed very comfortable retirements as a result - no money worries at all, nice holidays every year (often more than one), plenty of spare cash to do pretty much whatever they want within reason.  Yes, this comes at a cost during your working life, and it's a bit of a bu&&er if you go and shuffle off this mortal coil just a couple of years into retirement, but it's one more thing to consider.

Indeed. I’m a retired teacher. I worked full time for nearly 38 years and retired at the age of 59 on a final salary pension scheme. I now receive the state pension and I still work a couple of days a week as a supply teacher. I have more money to play with in retirement than I ever had while working. I always implore my 16 year old students to take pensions into account when choosing careers. I tell them I can’t believe how quickly my working life went by!

blue.peter

You might like to read this thread. This isn't the first time the subject has been raised here. My own view, as will be apparent if you read the older thread, is that it's not a helpful idea.

Ballard

I’ve never tried to follow a regimented system. I’ve used regular savers as a way to tuck some money aside and at maturity that went into my savings, but nothing more than that really. 

People who I’ve worked with over the years and have earned more than me have been known to complain about ‘needing payday’ a fair amount. I’m lucky in that I’m able to do without a car as I live in Greater London and have good transport options. I think that that’s been the main difference and I don’t regret never driving. As I say, this would be difficult for a lot of people, particularly those outside of a city. 

MEM62

That split suggests that you are reasonably comfortable in respect of your income compared to your essential costs.  If you are in that position then I would suggest that you are a little light on providing for your future.  I would look to be putting around 20% into a pension.