According to a 2015 survey by the National Bonds Corporation, 84 per cent of UAE respondents think that their savings are not enough for the future. Why so?

Sky-high rents and rising living expenses, coupled with a buzzing and active city life where being at home doing nothing translates into countless entertainment options foregone – can all be a recipe for ending up with the same account balance month after month. The end result – We’re just not saving enough!

How can we fix this? Can drawing out a structured budget help? And most importantly, how can we ensure we stick to this budget? To answer these questions, we take a look at a classic budgeting rule of thumb to get you going – the 50/20/30 rule.

What is the 50/20/30 rule?

The 50/20/30 rule is a classic guideline for budgeting. It splits your income into three broad categories – 50% towards needs, 20%  towards savings and 30% towards wants. Here’s a look at what expenses these categories comprise of.

Needs – According to the 50/20/30 rule, you should spend no more than 50% of your salary on basic necessities. This category comprises of your recurring fixed expenses every month which usually include house rent, the EMI on your mortgage, car loan or education loan, insurance premium, utility bills and groceries.

Savings – This budgeting rule also guides you towards saving at least 20% of your monthly salary in your preferred mode of saving. This could include saving in a deposit account, structured retirement savings plan or children’s education plan, saving for a mortgage downpayment or other long term investments. Besides this you should also maintain an emergency fund to help you out in times of need, and regularly put some money aside to replenish it.

[Related: Emergency fund – Are you prepared for the worst?]

Wants – This category takes into account your flexible expenses. These could include spending on eating out, travelling, retail therapy and recreation. These expenses determine a person’s lifestyle choices and can be labelled as ‘extras’. Following the 50/20/30 rule, you should limit your monthly spending on such wants to 30% of your salary.

[Related: Finding luxury in a financially responsible life]

Does it work for the average UAE resident?

Let’s take an example of a UAE resident earning AED 20,000 per month. Based on the 50/20/30 rule this is how one can allocate a month’s salary towards fixed and flexible expenses, along with comfortably contributing towards a savings and investment pool.

50% – AED 10,000 20% – AED 4,000 30% – AED 6,000   
House Rent AED 6,000 Transfer to savings account AED 2,000 Dining AED 1,000
Car Loan EMI AED 700 Retirement plan installment AED 1,000 Shopping AED 2,000
Life insurance premium AED 500 Transfer to emergency fund AED 500 Movies AED 500
Groceries AED 2,000 Other long term investment AED 500 Travel/Hobbies AED 1,500
Utilities AED 500 Other entertainment AED 1,000
Telecom AED 300

What’s wrong with the 50/20/30 rule?

The 50/20/30 budget is a general rule of thumb and it isn’t foolproof – while it may work for one person’s circumstances, it might not for another’s. For example two people earning the same salary may have different personal circumstances – say one lives in the UAE with his family and the other one’s single. It is most likely that the first guy would have to allocate a higher percentage of his salary towards his and his family’s needs, while the single guy can choose to save more than the required 20%.

Similarly, not all of us are equally frugal or equally spendthrift. While one may be comfortable sticking to the upper-limit of spending 30% on wants, another might be content in just spending half of that percentage.

[Related: Get smart with these saving tips]