What is the 50/30/20 budget?
It sounds easy. If you spend less than you earn and save what’s left – job done. But the only way you can do this is by budgeting.
To help you spend less than you earn you can use the 50/30/20 budget as a starting point and adapt the final budget to your lifestyle and income. The 50/30/20 Income rule states:
· 50% of your income should cover essentials (rent, utilities, groceries, petrol, etc.).
· 30% of your income covers none-essentials/discretionary spending (eating out, gym, fun, etc.).
· 20% of your income to save/invest (this is you paying your future self. Your future self will be grateful!).
Keep it simple. If you know your monthly essential costs, most of which are paid monthly by direct debit, and you are saving automatically by direct debit at the start of the month, then you will know how much discretionary spend you have for the month without any in-depth need to budget – it's what’s leftover.
Pay yourself first & automate
Don’t save what’s leftover after spending. Spend what’s leftover after saving. Pay yourself first!
All saving/investing needs to be automated or it won’t happen. Once these direct debits are set up, it’s done, and very rarely missed. This Builds Wealth! Automate your way to wealth!
Saving at least 20% of your income by paying yourself first every month, automatically by direct debit. I cannot stress enough…This Will Make You Rich!
Saving is easiest to do when you first start earning and begin straight away; you won’t even miss it. It becomes more difficult later on due to ‘lifestyle creep’. If you can’t start with 20% then just start with 5% ...anything!... then increase over time.
The 50/30/20 budget spreadsheet
Nobody likes to budget, but in the real world, the only way to ensure you spend less than you earn is to know your written budget. Where is all the money going?!.... Keep a simple spreadsheet:
The spreadsheet shows monthly essentials (£1,310 per month) and annual essentials (£2,000 per annum which breaks down to £167 per month). If your total essential costs are greater than 50%, try to reduce them by shopping around or using cheaper alternatives. Otherwise, you will have to take from discretionary or savings…the choice is yours….
All monthly essentials should be paid automatically by direct debit from the bank current account that your income is paid into. The exception to this is food and petrol which can be estimated by reviewing past months' spending.
The annual essentials which are budgeted for by reviewing past spending can either be left in the current account or moved to a savings account.
Wait...are holidays, Xmas, Sky TV, mobile phones all essentials!?
Yes…and No (Beware ‘Lifestyle Creep’). If you are spending ‘intentionally’ there will always be a cross-over between what is deemed essential and discretionary – it depends on you…as does the level of savings you are prepared to make.
The spreadsheet shows that this person has decided to save 20% per month. This should be paid automatically by direct debit from the bank current account that income is paid into at the start of every month. Paying yourself first, automatically.
The spreadsheet shows that money left over for discretionary spending comes to £523 per month. This should be moved to a contact card account for daily spending along with the budgeted amount for food and petrol. If you use a credit card for daily spending, then pay for the credit card in full by monthly direct debit from this card.
All you need to do now is make sure the contact card account is spent throughout the month and doesn’t run dry. If you are using a credit card in tandem, allow for this spend too (this involves more control).
If you underspend some months, great, this will build up a buffer for seasonal variations and bigger lifestyle spends e.g. a new phone.
Always check your accounts regularly: do a direct debit audit every month to ensure the correct amounts are coming out!
GO DO IT!