Budgeting: Potential rules to manage your personal finances

Sometimes it feels like your personal finances are getting on top of you. Money seemingly disappears into thin air as your bills, loan repayments, food shopping and subscriptions chip away at your income. Then, before you know it you’re waiting for pay day just to do it all again! So how can you pay debts, grow your savings, or find a little something to invest?

There are a few different budgeting rules that you might have heard of: the 50/20/30 rule, the 70/30 rule, and the 70/20/10 rule.

All those numbers! It looks like an enigma code (or worse, a maths problem!) But it’s actually really easy. The first thing to remember is that the numbers in all the rules are percentages, which add up to 100% of your monthly income after tax.

Percentages are great because they grow and shrink with your income. So you’re always setting realistic targets and getting an honest look at what you can afford to spend. Loqbox explains how they work so you can choose the rule that works best for you to budget your personal finances.

What is the 50/20/30 budget rule?

This rule is really easy! You just split your after-tax income into three parts. Here’s how to budget money for the 50/20/30 rule:

  • 50% for what you need; like your rent or mortgage, utility bills, food, and insurance.

  • 20% is reserved for your savings or debt repayments.

  • And 30% for the things that you want, like gym memberships, streaming subscriptions and nights out. It’s that simple!

This way you can get a true and honest view of what you can afford. You can use this rule to work out how much you can reasonably put aside each month and how long it will take you to get to your savings goal without stretching your finances.

How do you budget money using the 50/20/30 rule?

The 50/30/20 rule is a great tool you can use to organise your personal finances more efficiently. By dividing your monthly income into the things you need and want you can work out what you’ve got left to save for a rainy day or to chip away at any debts.

This is also a great rule to use before you take on a new loan. You can realistically work out  monthly repayments and compare it to the rates you’re offered.

The first thing you should do is look at your monthly income. Remember, this is the money that you take home every month after you have paid any tax, national insurance and student loans.

This is your starting number. Now take a look at your transactions for a few months and categorise any outgoings as ‘need’ and ‘want’. Let’s look at those sections in more detail:

50% for what you need:

The money that you ‘need’ every month is made up of your unavoidable payments and necessary costs. These are the things that you would really struggle to live without. The key is to be really realistic about these. 

Here are a few things that are often considered essential:

  • Rent
  • Mortgage
  • Utility bills
  • Insurance
  • Food
  • Transport
  • Any minimum loan or debt repayments you already have

So, for example if your post-tax income is £2,000 per month, your essential payments shouldn’t be higher than £1,000 per month. If you look at your most necessary payments and it’s coming to much more than 50% of your monthly take-home, you can try switching broadband providers for a better deal, look at better value food shops, or in more extreme circumstances consider downsizing your living situation.

20% for your savings and repayments:

Once you’ve worked out what your essential outgoings are, that leaves you with 20% of your post-tax income to put towards your savings goals or to pay off any loan repayments.

With a £2,000 income, you’d be squirrelling £400 per month into a savings account or towards a loan repayment. If you set up automatic payments from your bank right on pay day, you’ll avoid forgetting or being tempted to dip into that money.

With peace of mind that your finances are ticking over nicely with the 50-20-30 rule, you’ll have a solid savings plan before you know it! Using our example, in one year you could have £4,800 in the coffers!

30% for what you want:

Once you’ve worked out your monthly ‘needs and savings, it's time to look at what you’re spending that falls into the ‘wants’ category. Arguably, things that fall into this section are still needed for a good quality of life. But if you want to hit a savings goals or clear a debt that’s hanging over your head, it might be time to sacrifice some of these things until you’re ready to take them on again.

Looking at old transactions, you’ll often find things on the want list that you’d forgotten you were even paying for! It’s a great way to give your finances a spring clean and work out what’s really important to you. 

Lots of things can go on this list, but here are some examples:

  • Dining out

  • Gym memberships

  • Streaming services

  • Clothes shopping

  • Subscription boxes

  • Holidays

Using the 50/20/30 rule on an after-tax income of £2,000 would leave you with £600 to play with when it comes to the things that brighten your day. It’s not nothing, but you’ll find that it can start to disappear quickly if you don’t keep an eye on it. So set yourself that budget and make some tough decisions if you have to. It will be worth it in the end.

Of course you might have a higher or lower income, but because these are percentages, the rule works for everybody. It’s super simple, but for some people the wants and needs might be harder to define. This could be because their income is lower or because it changes every month. 

In this case, there is another rule you can use which is even more simple: the 70/30 rule!

What is the 70/30 rule?

The 70/30 rule is a really straightforward finance plan that works for everybody, no matter what your income is. Much like the 50/20/30 rule, the 70/30 rule works by splitting your post-tax income into two sections. Yep, you guessed it, 70% and 30%!

The main difference with this rule is that you’re combining your ‘needs’ and ‘wants' into a more flexible section. This is useful if your monthly income changes or doesn’t land on the same day each month. With just one number to remember, every time your money comes in you can immediately transfer 30% into your savings or towards your loan repayments. Done!

The other 70% covers your essential and nonessential payments. But you don’t have to feel restrained by these numbers. If you need more for your essentials or your savings goal is lower, just shift that to 80%. Because you’re only dealing with a single split, it’s much easier to be flexible.

But wait, what if you want a rule which also lets you put some money into an investment for the future? Loqbox has you covered! You can use the 70/20/10 rule. OK, more numbers. But this one is just as simple as the others.

What is the 70/20/10 rule?

The 70/20/10 rule is a variation to the budgeting rule that leaves room for investment. All you have to do is take the 30% from the 70/30 rule and split it into 20% and 10%. Everything works exactly the same, but you can use that shaved-off 10% to funnel into an investment. 

It’s better to invest once your debts are paid off. But if you have your debt repayments settled and you’re not looking to save for a big purchase, investing your money can make it work harder for you if savings interest rates are low.

So, what’s the best way to save?

You’ve chosen the rule that’s right for you and now you’re budgeting like a pro. But what should you do with the money you can afford to put towards savings? Why not make that money work hard for your credit score as well as work towards a savings goal? Double bonus! 

All you have to do is get started with Loqbox.  

We report your monthly savings payments to the three main credit reference agencies (CRAs) in the UK - Experian, Equifax and TransUnion. This means that by the end of the year you can hit your savings goal, and use that to pay off a debt or have an emergency fund to help your peace of mind.

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Give your credit score a boost
For just £2.50 a week, you could see your credit score rise by up to 300 points in the first three months
Get started
Improvements to your credit score are not guaranteed