Budgets are terrifying.
There. We said it.
If you are like most people, whenever it’s suggested you make – and stick – to a budget your mind immediately begins to panic “Don’t worry beer money. I won’t let them get you. Nandos, don’t look at them and maybe they’ll go away!”
The fact is that when a budget is suggested to many of us we immediately focus on the negative and the idea that having a grown-up budget means you have to be accountable for – and ‘sensible’ with every pound you earn is suffocating.
But it doesn’t have to be that way. Not if you work with a budget plan that doesn’t put a stranglehold on your fun money.
And here’s the big reveal: it turns out there is a budget out there that does just that. It’s called the 50/20/30 budget plan, and it’s perfect for people who freak out at the thought of budgeting. Seriously, you can even keep your morning Starbucks run.
How to Use the 50/20/30 Budget Plan
The idea of the 50/20/30 budget plan was popularized in America, by the U.S. politician Senator Elizabeth Warren, a bankruptcy expert, and her daughter, business executive Amelia Warren Tyagi, in their joint book “All Your Worth: The Ultimate Lifetime Money Plan.” The goal is to break down your monthly take-home income and focus your spending in three broad categories.
Essential Living: 50%
This category is for the essential bills. Let us emphasize that word: essential.
Rent or mortgage: You know, that place where you live.
Utilities: So you can cook and watch TV
Food: Because you do have to pay for the food you cook
Car insurance and/or car payments or Train/Bus Fare – You do need to get around… right?
Phone and internet: Let’s face it, they’re essentials these days and there is no getting around that argument.
Credit card and loan minimum payments: Make no mistake: Making your minimum payments on your debts is essential. You can’t afford to deal with the late fees and credit risks of not meeting that basic requirement.
Financial Goals: 20%
This second category puts the focus on helping you improve your overall financial health. It turns out that being less poor is more fun than being poor. #lifegoals
Investments: This includes your 401(k) and all other investments. Don’t have any yet? It’s never too late – or too early – to start investing.
Savings: One of the biggest steps to financial health is having emergency savings so you don’t step backward every time an unexpected expense pops up.
Debt-reduction payments: This is for payments on your credit cards, student loans and any other debts that are above the minimum payment.
Yes, that £400 you borrowed from your cousin for that week in Benidorm fits here. Even though it’s interest-free, you may want to pay them back first, for the sake of family peace. As long as you owe money, it’s hard to get ahead.
Personal Spending: 30%
This is the category that makes this budget work for the budget-squeamish. It’s all of the stuff you like to spend money on but don’t really need to. You know, goofin’ off money. Did you notice the percentage? It’s a decent amount.
Dining out: Because eating at a restaurant means no washing up!
Holidays: You could make a case for holidays being a necessity, but for this budget, they’re not. Save up for one and then enjoy whatever you save enough for without the guilt — or your credit card.
Going out: Seriously, socializing is important. Very important. Your morning latte? Those Friday night pints? Go for it. Budget responsibly for it, and it’s all good.
Tips for Budgeting Success With the 50/20/30 Rule
Let’s start with the biggest chunk. That 50% number you should put toward necessities is a maximum.
If your monthly bills are higher than 50% of your monthly income, you need to make some adjustments. Ideally, your housing shouldn’t cost more than 30% of your take-home pay. If it does, you may need to consider downsizing. It’s not fun, but it could be a key step to getting ahead financially.
Find other ways to cut your monthly expenses by making your home more energy efficient and shopping smarter at the supermarket. How much space do you have outside? Maybe it’s time to start a garden to keep those costs down. Come on, get a little dirty — you might even love it.
Next, take a good look at your personal spending. Again, that 30% is a hard line. If you go over your past year’s bank statements, you’ll probably find that you are fudging a bit high in this category. That needs to change.
How often do you eat out at restaurants? Be honest with yourself and think about lunch during the workday, too. Can you trim that? You can probably cut that in half without suffering a bit.
Take a closer look at your TV, phone and internet bills. Do you need all of those premium services? Cut back a little and see how you do.
Then there is shopping. We all love it, even if we claim we don’t. It may be clothes. It might be books. Whatever your favourite indulgence is, set a budget for yourself. Have old stuff you don’t want anymore? Sell it and add that money to this part of the budget!
Finally, realize that the 20% is where this simple budgeting system helps you the most. That 20% is not a set in stone figure. If you can find a way to save more, pay off more on your debts or boost your investments, do it.
The goal of budgeting is to get out of debt, and increase your savings and investments. Of course, you want to get to a point where you can buy your dream home and have the income you need to take amazing holidays and live the life you dream of living. To do that, you need to zero in on eliminating that debt and growing your personal wealth.
Is it fun? No, but with the 50/20/30 rule, it’s not torture, either.