What is the 50/30/20 budget?

They say the best laid plans often go awry and the same can be said of budgeting.

We all start with the best of intentions, detailed spreadsheets at the ready, as we brace ourselves to commit to a serious budget with every penny accounted for.

However, what if we told you there was a way to cover your monthly necessities whilst still having the funds to still have a little fun and save?

It might sound too good to be true but that’s exactly what the 50/30/20 budget is all about.

The beauty of this budget lies in its simplicity.

A brainchild of US senator and bankruptcy expert Elizabeth Warren the popular technique offers financial responsibility without the pressure of tracking every penny.

It’s designed to help you pay your bills, work towards your financial goals all whilst still splurging on yourself.

The 50/30/20 is the budget for the people who don’t like the thought of being constrained by a traditional financial plan, but just how exactly does it work?

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How does the 50/30/20 budget work?

This budget is all about finding a balance by dividing your spending into three categories:

  • 50 per cent of your after-tax income should go towards your needs such as housing, expenses, food, child care, transport and minimum debt payments.
  • 30 per cent should go towards things that you want – think travel, entertainment such as your Netflix subscription and all the other little things that make you smile.
  • 20 per cent should go towards financial goals such as savings and investments.

No complex spreadsheets or technological tools, the 50/30/20 budget is about taking spending back to basics and is a great starting point for those new to budgeting and those keen to change their approach.

However, when considering this plan, it’s important to be realistic and make room for flexibility. Life doesn’t always go the way that we hope which is why it’s important to allow for the budget to be changed on a month to month basis should you need to. For example, if the area you live in comes with high living costs you should tweak the budget to allow for 55 per cent needs and allocate 25 per cent of your monthly income to the things you want and so on.

So, where do you begin when sitting down to plan a 50/30/20 budget that suits your lifestyle?

It all starts with your after-tax income – basically the total you find on your pay slip. If you’re self-employed this includes your gross income minus business expenses and the money you set aside for taxes. Do you and your partner combine your incomes? Just add your after-tax income together to create a budget for your household.

Identify your needs

The next step is simple – it’s all about taking note of all of your vital monthly payments. According to the rule you should contribute 50 per cent of your after-tax income to necessities. From your rent or mortgage costs to car payments, food and utility bills and, of course, minimum debt payments these are the bills you have no choice but to pay to survive.

Everyone has slightly different opinions on what they consider to be an every day need, however, the most important thing to note here is the difference between a necessity and a luxury. This means being brutally honest with yourself and although it might be tough to accept but your morning Starbucks or weekly lottery punt don’t count here.

What do you want?

Who’d have thought you could budget without having to deny yourself life’s little pleasures that never fail to cheer you up? According to the 50/30/20 rule you can do just that, as long as you pledge to limit your ‘want spending’ to 30 per cent of your monthly income.

It might seem obvious, but a want is an expense you could go without spending and not notice any difference in your quality of life. Items such as designer clothes and shoes, take away meals, holidays, toys and gadgets all fall into this bracket. Upgrades also fall into this category, whether that be mobile phone upgrades or opting for a new car.

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Look to the financial future

The remaining 20 per cent of your budget should go towards your financial future. Whether it’s squirreling money away for a rainy-day fund or making pension contributions, this category might require the least amount of input but it’s actually the most important.

They say if you expect the unexpected you might just be prepared and the best way to do that is through financial stability. 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.

This section can also offer the chance to pay more towards any debts you have already incurred should you wish to repay what you owe quicker. All it takes is a little rejig of the plan. For example, 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 – simple.

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, contact a Carrington Dean money advisor on 0141 413 4035 or visit carringtondean.com