The 50/30/20 rule requires no spreadsheet and is a simple method to help you build a financially sound budget. It’s a sure-fire way of helping those of you saving for that dream home, or for anyone finding it tricky to tackle any form of debt.
Senator Elizabeth Warren popularised the so-called "50/20/30 budget rule" in her book, All Your Worth: The Ultimate Lifetime Money Plan. The idea here is simple - divide your after-tax earnings so that 50% goes on the things you need, 30% on the things you want, and 20% on saving towards your financial goals.
Please note this rule should only to be used as a rough guide. Furthermore, living costs can be more expensive in some parts of the country. For example, people in London may find that 50% of their income isn't enough to cover their basic needs so in that case, adjust the percentage to better suit your situation e.g 60/20/20.
Consider your relationship with money
But before we look at how to create a 50/30/20 budget, it’s worth thinking about your relationship with money. Do you have a credit score that makes lenders want to jump all over you, or are you the type who runs for the hills when your monthly statement rolls in?
Whether you're the last of the big spenders, or the queen of penny-pinching, taking a minute to analyse your relationship with money is a good place to understand your spending strengths and weaknesses so you can make actionable changes to improve your financial position.
We ran an Instagram poll to get your thoughts on budgeting and although it was a 50/50 split between spenders and savers, over 57% had never audited their finances before. Remember, there is always room for improvement regardless how good (or bad) you are with money, and the 50/30/20 budget is an excellent place to start.
How to create a 50/30/20 budget?
1. Work out your spend thresholds
Once you’ve thought about your financial habits, the first step in creating this budget is to figure out how much money you take home each month after tax and then multiply it by 0.50 (for needs), 0.30 (for wants), and 0.20 (for financial goals) to see how much you should ideally be spending in each category.
2. Identify your needs?
Make a list of all the costs of things you can’t live without e.g. mortgage/rent, food, gas, electricity, water, minimum payments on credit, phone bills etc.
3. Identify your wants?
Make a list of all the costs of the things you desire but don't need to survive e.g eating out, Netflix, Sky, gym membership, ‘nice’ clothes, furniture, booze, fancy food, hobbies, mobile packages.
4. Identify your financial goals?
You should keep 20% of your monthly earnings for savings, investments and paying off all things debt-related. Please note, debt repayments in this category are anything over the minimum repayment amount. For example, paying more off your credit card so you clear the debt faster.
5. Plan your budget against your spending targets
Keep track of what your spending against each category identified in step one. If you overspend in a particular category, you know that is an area you need to work on. Equally, some expenses may be hard to place because they cover a need but are a bit of a luxury. For example, you need a car, just not a Bentley. You could split these costs between the 'need' and 'want' categories to balance them out.
Generally speaking, we are all guilty of unknowingly spending too much and as a result, saving too little. If anything, just sitting down to work out how much of your earnings you should allocate to each category should provide more clarity on what things you need to spend less on so that you can save more for the things that matter to you most.
Next week we’ll be introducing you to a super talented craftswoman who launched a range of candles aimed at empowering women - and she has an Instagram feed to die for. Stay tuned.
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