Follow the simple 50/30/20 rule and get your finances back on track next year

Linda Howard
·4-min read
A man is counting money with his young daughter who is putting it into a savings bank shaped like a pig while his pregnant wife looks on
-Credit:Getty Images/iStockphoto


At this time of year many people start to plan ahead and think of the changes they might be able to make to help improve their current financial situation. The New Year offers a golden opportunity to wipe the slate clean, erase the mistakes of the past 12 months and start January with some realistic changes you can follow every day.

However, new figures from the Office for National Statistics (ONS) indicate that the cost of living is still putting pressure on household budgets. The Consumer Price Index (CPI) inflation rate was 2.6 per cent in the 12 months to November, the highest level for eight months, mainly because food and non-alcoholic drinks, alcohol and tobacco, clothing and footwear, recreation and culture all edged higher over the year to November, compared with the year to October.

READ MORE: How to make your December pay last until January with these seven money-saving tips

READ MORE: How to save over £667 by the end of next year with the 1p daily savings hack

This means that inflation has been above the Bank of England's target for two months in a row. The Bank moves interest rates up and down to try to keep inflation at 2 per cent, and cut it twice in 2024, taking rates to 4.75 per cent.

While this might make for grim reading for the New Year, all is not lost, as one simple way to instantly take control of your finances and your spending is to follow the ‘50/30/20 rule’.

This budgeting method offers a quick and reliable way to get your finances on track - and stick to it. Katy Simpson, personal finance expert at Virgin Money, explains it step-by-step to help you decide if it’s something that could help you start the new year on the right financial footing.

Katy said: “The 50/30/20 budgeting method encourages people who can afford to split their income into three parts to do so. Following this simple method for budgeting will allow people the fun and freedom they want while still being responsible with their money.”

The 50/30/20 method involves putting aside:

  • 50% for essential spending such as bills and food shopping)

  • 30% for non-essentials such as eating out and style and beauty

  • 20% - into savings

50% Essential Spending

Spend 50 per cent of your income on essentials such as housing costs, food and energy bills.

While it might be tempting to think about planning exciting activities throughout the year such as holidays, festivals and days out with friends and family, you first need to consider essential spending and any financial commitments and savings goals.

Katy explained: “Tackling those essentials enables people to have a better idea of how much money they have spare for saving and non-essential spending. Some may find that the essentials are taking up more than 50 per cent of their budget.

“In these cases, it's always worth checking for any unnecessary spending that could be cut back on. For example, is that gym membership or streaming subscription being used enough to justify the cost right now? If not, consider pausing or cancelling the membership/subscription until it’s needed again.

“It’s also useful to check whether they’re paying more than they need to for essential bills. People should check their phone contract, if it's running over the initial contract period and they haven’t upgraded, they might be eligible for a reduction on their bill. They can also shop around for providers offering cheaper deals on services like broadband or car and home insurance."

30% Fun

Spend 30 per cent on the fun parts of life like shopping, takeaways and dining out.

Knowing what to spend money on is likely no issue but knowing which social activities to prioritise to help make money go further can be tricky.

Katy advises: “Try to get into the habit of being open about your finances with friends and family. Set boundaries, know when to say no and don’t feel bad for doing so.”

She added: “FOMO (fear of missing out) can be a big factor to navigate when it comes to plans, but to help Brits stay on track with budgeting and hit their savings goals, it will pay to prioritise the plans they really want to do.”

20% Savings

Put 20 per cent away for savings, long-term goals, paying off any debts or a future emergency fund.

The last part of the budget is kept for savings. Regular saving is important, whether it’s putting money away for something in particular or building a cushion for any unexpected spending in the future. Saving a little each month can go a long way.

Katy said: “Aiming to put 20 per cent of your income a month into a separate savings account is the ideal amount according to the method. Not everyone is able to stretch their finances to this, so instead, they should work out what they can afford to put away regularly.

“Little and often is still a valuable way to keep finances healthy ahead of winter.”

Katy also said that the 50/30/20 method makes it easy to apply to a variety of different incomes, but added that some people may find their spending is more like 70-20-10.

The key thing is to follow one method that is manageable for your household finances.

Latest stories

  • The benefits being completely moved to universal credit next year

    Here's what to do when you receive a migration notice from the DWP, and what benefits are scheduled to be transferred to UC in 2025.

  • Stock market plunge: Should you be worried? Experts weigh in.

    Panic convulsed the stock market within minutes late Wednesday after the Federal Reserve announced that it expects fewer interest rate cuts next year. The S&P 500 plummeted nearly 3%, which amounted to the largest dip the index has taken following a Fed meeting since 2001, according to data shared with ABC News by Deutsche Bank Research. Experts who spoke to ABC News described the selloff as an omen of tumultuous days ahead, pointing to a potentially prolonged spell of high interest rates as well as uncertainty surrounding the U.S. economy under President-elect Donald Trump.

  • This bank’s dividend yield will grow to 6.9% in 2026! And analysts say its undervalued

    Analysts say this FTSE 100 stock’s dividend yield will continue to rise over the medium term. With the stock also undervalued, now could be the time to act. The post This bank’s dividend yield will grow to 6.9% in 2026! And analysts say its undervalued appeared first on The Motley Fool UK.

  • Taxpayers pay record capital gains bill in Labour’s first six months

    Panic-selling investors have paid more in capital gains tax since Labour came to power than any comparable period, official figures show.

  • Best savings accounts that offer above-inflation rates, 20 December

    Check the best savings accounts to find a top-rated deal that works for you.

  • Bank of England to pause interest rates as inflation jumps

    The Bank of England is poised to keep interest rates on hold after inflation surged to an eight-month high and households were told to brace for further price rises.

  • Thames Water fined £18m by Ofwat for breaking shareholder payment rules

    The UK's biggest water company has been fined £18.2m for "unjustified" dividends which the regulator said broke shareholder payment rules.

  • Warren Buffett Says A Surge In People Doing 'Big Dumb Things' Is Tied To Historically Easy Access To Other People's Money

    Warren Buffett, the “Oracle of Omaha,” shared significant thoughts on investing at the 2023 Berkshire Hathaway Annual Meeting. One of his main points? More people are making bad money choices – what he called “big dumb things” – because of the unprecedented ease of accessing other people's money. According to Buffett, there has been a significant increase in opportunities for investors due to this phenomenon. Don't Miss: Can you guess how many Americans successfully retire with $1,000,000 saved?

  • As public sector pay soars, Britain braces for it to rocket even higher

    Public sector pay jumped sharply in November as the Government prepares for a further surge in spending next year.

  • 1 FTSE 100 stock I expect to outperform in 2025

    Can the integration of its big acquisition from 2022 finally lead Rentokil Initial to outperform the FTSE 100 next year? Or is the stock a value trap? The post 1 FTSE 100 stock I expect to outperform in 2025 appeared first on The Motley Fool UK.

  • 2 cheap shares I’ll consider buying for my ISA in 2025

    Harvey Jones will be on the hunt for cheap shares for his ISA in 2025 and these two unsung FTSE 100 heroes caught his eye. Are they good value? The post 2 cheap shares I’ll consider buying for my ISA in 2025 appeared first on The Motley Fool UK.

  • The Fed is the only thing standing between investors and a full-blown stock bubble, UBS says

    The Fed would need to lower interest rates by another 100 basis points for the final ingredient of a bubble to be added to the mix, UBS says.

  • These are my top FTSE 250 REITs for earning passive income from dividends

    The 90% profit distribution rule applied to REITs makes them an attractive option for dividend investors. Here are two of my favourites on the FTSE 250. The post These are my top FTSE 250 REITs for earning passive income from dividends appeared first on The Motley Fool UK.

  • MrBeast's new show already faced controversy. Its new giveaway partner may bring more

    MrBeast's ambitious reality show, which the YouTube megastar hopes will expand his giant online reach and turn the corner on recent controversies, is already raising questions from consumer advocates over a partnership with a fintech company. Shortly after reaching never-before-seen YouTube subscriber totals, MrBeast began facing heightened scrutiny over past “inappropriate content,” the channel's philanthropic efforts, its workplace culture and allegations of dangerous on-set conditions that Donaldson has denied. As MrBeast's loyal following tunes in to watch 1,000 contestants compete for $5 million on “Beast Games," they are invited to scan a QR code for a shot at winning their own life-changing money.

  • The full list of Shoe Zone stores that are closing down

    Hordes of stores will soon close their doors for good... but is your local set to be affected?

  • Lure of Anglo's copper mines could test BHP's spending resolve

    (Reuters) -BHP, the world's biggest miner, would need to offer a minimum 40% premium over Anglo American's share price to make a renewed takeover bid now the rival's value has been boosted by asset sales, two sources close to the matter told Reuters. As diversified miners shift their focus to metals needed for the transition to cleaner energy, copper, with multiple uses from power to construction, has attracted intense interest. BHP wants Anglo's prized copper assets in Chile and Peru.

  • Billionaire Mike Ashley denied Boohoo board seat after boardroom battle

    British billionaire Mike Ashley has been denied a seat on the board of fast-fashion business Boohoo. A majority of Boohoo shareholders rejected efforts by the Sports Direct founder at a meeting in Manchester on Friday, with 64% of votes opposing the appointment. A similar number also denied restructuring expert Mike Lennon a seat on the board.

  • Stocks suffer as Trump calls for US shutdown to ‘begin now’

    Donald Trump triggered a turbulent end to the week as stocks plunged after he called for a US government shutdown to “begin now” under Biden, rather than under his administration.

  • Wells Fargo Eyes Double-Digit S&P 500 Growth in 2025, Target 7,000

    Higher Real Yields Could Hurt Stocks, Boost Bonds, Says Wells Fargo

  • Russian central bank keeps rates on hold after Putin's call for 'balance'

    MOSCOW (Reuters) -The Russian central bank kept its key interest rate on hold at 21% on Friday, surprising the market, which had expected a 2 percentage point increase, and saying recent tightening had created conditions for inflation to fall towards its target. The decision came a day after President Vladimir Putin in a nationwide phone-in publicly called for a "balanced" decision from the bank, which is having to manage the inflationary effects of the militarisation of the economy due to the conflict in Ukraine. "Given the notable increase in interest rates for borrowers and the cooling of credit activity, the achieved tightness of monetary conditions creates the necessary prerequisites for resuming disinflation processes and returning inflation to target," the central bank said in a statement.