How much should you save? What’s an okay amount to spend on your rent or mortgage? Are you eating out too much?
These are all common – and fair – questions. And the answers will vary depending on your circumstances.
However, you can use some general guidelines to decide if you’re happy with how and where you’re spending your income. Then you can decide if you’d like to make changes.
A useful spending guide is the 50-30-20 rule.
The idea is you’d aim to spend:
- 50% of your income on needs: essential living expenses, such as rent/mortgage, bills, food and transport to work
- 30% on wants: discretionary spending, such as eating out, shopping, trips and subscriptions
- 20% on saving or debt – paying off debt beyond minimum payments, or putting money into a savings account, investment or pension fund
So if your monthly income was £1,500 after tax, you might spend:
- £750 on essentials
- £450 on wants
- £300 on savings or debts
Remember, everyone’s situation is different. If you find your spending doesn’t fit the 50-30-20 rule, that’s okay. But, if it’s realistic for you, it could give you a good goal to aim for.
How to apply the rule
Start by looking at how much money you have coming in on a regular basis. If you’re working, this will primarily be your salary. If your income changes from month to month, work out the average over the last 3 months.
Then, looking at your bank statements for the last 3 months, work out your average monthly spend. It can help to categorise your expenses so you can see specific areas where you may be overspending.
These categories should include your ‘needs’, which are regular outgoings like:
- rent or mortgage
Plus your ‘wants’, such as:
- eating out
Then note any money you’re putting towards:
- repaying debt
Once you know how much you’re spending in each area, you can work out the percentage by:
- Dividing the amount you’re spending on needs per month by your monthly income, for example:
£750 ÷ £1,500 = 0.5
- Multiplying that number by 100, for example:
0.5 × 100 = 50%
Now you’ve worked the percentages out, how do you compare? Again, it’s okay if your spending doesn’t fit this rule. But, if you’re looking to save more, or repay debts faster, you may be able to make some changes to get closer to 50-30-20.