Budgeting methods

There are different approaches to budgeting. But, they are all underlined by the same principle:having clear proportions of income allocated to your needs, wants, and your future. The traditional budgeting method is referred to as the fifty-thirty-twenty rule. This budgeting method suggests that 50% of your income should go on your needs, 30% on your wants, and 20% on your future – whether that’s savings, investments, or rainy day funds. To use this method, you’ll first need to map out your current spending on your needs, wants, and future goals. Then, do a quick calculation.Take your income and divide by two. Compare this amount to the amount you are currently spending on needs. The difference between the two isn’t necessarily anything to worry about, but it will help to give you an idea of how this ratio might look for your budget.

While you’re in service, your cost of living can look quite different. For example, service personnel who don’t have dependants or additional financial responsibilities, and are living in Single Living Accommodation, may have fewer outgoings, which can make ratios like twenty-twenty-sixty, or thirty-twenty-fifty possible – with a larger share of income going towards saving or investing for the future. However, this won’t apply to everyone. Families, reservists, veterans and other service personnel may have additional commitments such as childcare, retraining, or dual-household costs, which change how income is divided. 

So instead of aiming for one specific ratio, it’s more helpful to understand the principle. Your needs, wants and future all matter – and the balance will look different depending on your circumstances. There will be times where these proportions shift, especially during high inflation periods, when the cost of essential items increase. This is a guide to show you how much wiggle room you may have in your budget. It also helps to identify where you have money in your budget to prepare for lean periods if they arise.

On the flip side, if you’re responsible for more household bills – for example if you’re in Service Family Accommodation, privately renting, or after you leave the forces – the rising cost of living might mean that spending more than 50% of your income on your needs is unavoidable. For example, if electricity bills increase, you will spend more on your needs. Will this shortfall come at the expense of non-essential spending or savings? This is where it’s important to have a clear picture of your financial goals.

It is also important to consider debt management. The money freed up once debts are paid off can be allocated to your needs, or you might decide to save more. If you’d like more support with this, our videos on managing debt explore practical ways to manage borrowing.

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Always keep your financial destination in mind when budgeting. Set yourself goals and keep those goals in focus. Save first – this might mean setting up a direct debit for a manageable amount on your payday, and then working with the rest of your budget for everything else. To stay on track with your budget, you might find so-called envelope budgeting helpful. This is where you divide your money into different spending categories – for example, groceries, travel, or leisure – traditionally using cash in separate envelopes. However, using physical cash isn’t practical or secure for everyone, especially if you’re serving and living on camp or in shared accommodation where there’s a higher risk of loss or theft.

Cash stored in envelopes also can’t earn interest. There are banks that can help you do something similar to this via apps, giving the option to use digital ‘pots’ or ‘wallets’ to ring fence spending. There’s no one-size-fits-all approach to budgeting. What matters most is finding a method that works for you and helps you stay focused on your goals. Revisiting your budget if your circumstances change will help you remain flexible and in control, so you can feel more confident about your money and your future.  If you’d like to learn more, our next video will guide you through using digital tools to automate your spending and saving.