Have you heard of the 50/30/20 budget rule?
When was the last time you sat down and considered your monthly budget?
For many, budgeting is easier said than done and can seem like a straitjacket that will prevent them from doing what they want, when they want.
However, the reality couldn’t be more different.
A planned and considered budget can give a clear picture of where your money goes each month. In its simplest form a budget is basically just a plan for your money, offering greater financial freedom than ever before.
Budgeting is the best way to plan for the future and achieve set goals you’re working towards. Regardless of whether it’s saving for a special occasion, keeping on top of utility bills each month or getting out of debt – your budget is your ticket to a stress-free financial future.
A budget done correctly is the most precise tool for analysing and making the most of your finances and for thousands around the world the 50/30/20 budget rule is their go-to method.
But just what exactly does this involve?
Here we shine a light on the straightforward budgeting process that can help make your money work harder for you.
What is the 50/30/20 budget?
Coined by US senator and bankruptcy expert Elizabeth Warren the concept of the budget is simple. The basic rule is to divide after-tax income, splitting it between needs, wants and savings. This means spending 50 per cent on needs, 30 per cent on wants while allocating 20 per cent to savings.
This budget is useful if you’re keen to get on top of debt, save steadily over the long-term, cover essential costs more reliably and avoid the stresses of sticking to an incredibly detailed budget.
But just how do you get started?
Identify your needs
Your needs are the bills that you have no choice but to pay to survive – life’s biggest necessities. When considering what you need in day-to-day life, think rent or mortgage payments, car payments, minimum debt payment and utility bills.
Of course, everyone has slightly different opinions on what they consider to be an everyday need. The most important part of differentiating your needs from a luxury is being brutally honest with yourself about what constitutes as being a vital necessity. It might be tough to accept but your Netflix subscription or morning Starbucks need not apply here.
Once you identify your needs you must make sure that you don’t spend more than 50 per cent of your monthly income on them.
What do you want?
Wants are the non-essential items you spend money on that aren’t essential. This category takes into consideration all of the little extras you spend your hard-earned cash on to make life that little more fun.
According to the plan you should spend 30 per cent of your income on things such as electronic gadgets, gig or sporting tickets and holidays. Your wants also include any upgrade decisions you make – for example if you order a steak instead of a cheaper pasta dish in a restaurant or if you opt for a Range Rover instead of a more economical Honda when the time comes to buy a new car.
Now as amazing as spending almost a third of your earnings on your favourite things might sound, you should make sure your ‘wants’ don’t take up more than 30 per cent of your monthly earnings.
Make repayments and save
Finally, the remaining 20 per cent of your monthly earnings should be used towards making repayments and saving. From making pension contributions to building a rainy-day fund for emergencies, this category might require the least amount of input but is possibly the most important.
While minimum debt payments fall under ‘needs’ this 20 per cent payment can go towards additional repayments on loans and credit cards. To put it simply, if your minimum monthly credit card payment is £50 but you choose to pay £100, £50 of the funds would go in the ‘needs’ section and the other £50 would fall under this category.
The importance of saving for a rainy day should never be underestimated and despite the smallest proportion of your monthly budget going towards this, you should always strive to save as much money as possible to prevent potential financial distress in the future.
If you find yourself struggling to set up and manage a budget or find yourself unable to make a pay cheque stretch from month to month, be sure to check out the Creditfix Budget Calculator. Our useful tool can offer an idea of your financial position at the click of a button.