Surviving the Cost of Living Crisis
The ongoing cost of living crisis, along with the temperamental weather, has put a dampener on plans and activities as we try to make the most of summer. Finding a balance between enjoying life and managing financial responsibilities has become more challenging than ever.
The very first blog written on this website discussed the 50/30/20 budget; without this essential tool, you cannot know if you are able to ‘spend less than you earn’, which then enables you to ‘Save, Protect, and Invest’ your way from Grad Rags to Riches.
The 50/30/20 Budget: Your Path to Financial Freedom
The 50/30/20 budget is a rule of thumb method that has gained popularity for its simplicity and effectiveness. The concept is straightforward and adaptable; no matter the size of your household income, this spending rule can be tweaked to suit your budget.
Imagine splitting your income into three distinct categories:
50% for Essential Spending (Needs) – The pillar of financial stability. This encompasses bills, food, and other necessary expenses; it is the foundation upon which your financial well-being is built.
30% for Non-Essential Spending (Wants) – The realm of indulgence. Here is where you allocate funds for eating out, entertainment, gym memberships, gadgets, hobbies, subscription services; discretionary treats that add flavour to life.
20% for Savings (Security) – The bedrock of future resilience. This portion is dedicated to debt repayment, putting money aside for unexpected financial emergencies, savings and investments; ensuring your financial foundation remains solid and adaptable.
But a rule of thumb is just that - a guide. If you looked at the outgoings of 100 people earning the same amount of money, none of them would split their outgoings in exactly the same way because everyone’s financial situation is different.
It may be boring, but the only way that you can guarantee your financial future is by knowing exactly how you are spending your income. Take a good hard look at your outgoings; go through your bank account statement/s and credit card statements, and make a list of all of those things which you spend money on weekly, monthly, and annually, and then break them down into essential and non-essential spending.
Essential Spending: Navigating the Changing Landscape
Our ‘needs’ are costs we have to incur in order to survive, they are a constant feature in our budget; you need somewhere to live, clothes to wear, and adequate food and water to stay in good health. These things are non-negotiable, so the starting point for budgeting begins with looking at how much money we must allocate to essential living costs.
The issue is that over the last few months, almost all of our essential living costs have seen significant price increases, and some are still going up. The cost of food shopping has been rising steadily over the past few months, the amount we pay to fill our cars, heat our homes, and many other costs have increased substantially over the past year.
In an attempt to curb inflation, the Bank of England has hiked interest rates from 0.1% in December 2021 to 5.25%, increasing mortgage costs significantly, and landlords will undoubtedly pass the cost on to tenants through increased rent. Credit cards with rates linked to the base rate will cost more in increased borrowing costs.
In an era where the cost of essential living expenses is on the rise every month, it highlights the importance of prioritising needs and investigating whether these unavoidable expenses can be reduced. Scrutinising bills, switching providers, and finding economical alternatives becomes a key strategy in safeguarding your financial health.
Non-Essential Spending: Balancing 'Wants' and Fiscal Responsibility
While it might be tempting to think about planning exciting activities over the summer, such as holidays, festivals, and days out with friends and family, first you need to consider essential spending and any financial commitments. Tackling these essentials enables you to have a better idea of how much money you have spare for saving and non-essential spending, and avoiding going into debt.
The income allocated for discretionary spending opens the door to entertainment, leisure, and the finer things in life. However, with rising prices and economic uncertainty, making strategic choices becomes paramount. By setting boundaries, prioritising meaningful experiences, and occasionally opting for lower-cost alternatives, you can enjoy life's pleasures without compromising your financial equilibrium.
Once you have clarity on the lowest level your essential spending can go to, then you can work out how much of your income is left to split between the other two options; ‘wants’ and savings.
Secure Your Future: The Power of Savings
The cornerstone of long-term financial security lies in the income designated for savings, investing, and debt repayment. Regular contributions to emergency funds, savings accounts, and retirement plans, build a sturdy fortress against unforeseen challenges. Despite economic fluctuations, committing to this portion ensures your future self remains safeguarded against financial turmoil:
• Canceling direct debits into savings accounts may seem an easy option to free up cash for the things you ‘need’ and ‘want’ today, but it means you’re likely going to miss out on those financial goals you have in the future.
• Reverting back to paying only the minimum balances on credit cards or loans means you will end up paying more in interest payments over the lifetime of the debt.
• Canceling payments towards investments will mean you miss out on the benefit of compound interest which increased the value of investments exponentially over time.
• Dialing back pension contributions or stopping them altogether because you feel as if retirement is a long time away will impact your future life. Not only do pensions grow with the power of compound interest but your pension contributions are topped up by tax relief from the government - free money!
• Don’t make the mistake of using your emergency savings for anything other than emergencies. Keep a stash of cash available for those things that you haven’t planned for in your budget and which have the potential to really knock you financially. If something unexpected happens and you don’t have a cushion to fall back on, you may need to resort to credit cards or loans which will ultimately cost you a lot more over the long-term.
Aiming to put 20% of income a month into a separate savings account is the ideal amount according to the method, but not everyone is able to stretch their finances to this, so instead, work out what you can afford to put away regularly. Little and often is still a valuable way to keep finances healthy.
Adapting to Changing Times: The Evolving 50/30/20 Budget
While the 50/30/20 budgeting method serves as a timeless compass, the cost of living crisis has reshaped the financial landscape, prompting a re-evaluation of the rule of thumb; you may find that the essentials are taking up more than 50% of your budget. Adapting means checking for any unnecessary spending that could be cut back on, optimising essential spending, making strategic sacrifices, and ensuring you are resilient in the face of economic uncertainty:
• Check whether you are over-paying for essential bills by comparing your current deal to the best deals on the market. This might result in you switching your mortgage provider, or utility supplier, to get the best deal available based on your circumstances.
• When it comes to groceries, it may mean changing where you shop, meal planning to avoid wastage, and buying in bulk to make sure you are getting the most for your money. It can be time-consuming but it is time well spent.
• Check your phone contract, if it is running over the initial contract period and you haven’t upgraded, you might be eligible for a reduction on their bill or even move suppliers to a cheaper deal e.g. a sim-only deal. You can also shop around for providers offering cheaper deals on services like broadband, car and home insurance.
• Check whether you are paying more than needed for non-essentials; is that gym membership or streaming subscription being used enough to justify the cost right now? If not, consider pausing or canceling the membership/subscription until it is needed again.
• FOMO (fear of missing out) can be a big factor to navigate when it comes to non-essential spending, but to help you stay on track with budgeting it will pay to plan ahead and prioritise what you really want to do. Why not suggest low-cost activities, such as a picnic in the park, a BBQ at home, or a walk in the countryside, that way you won’t miss out on spending quality time with family and friends, and will boost their savings too!
Surviving the Cost of Living Crisis
In an era of economic uncertainty, the 50/30/20 budgeting method emerges as a reliable compass in helping you chart a course through the cost of living crisis while maintaining financial integrity. By being aware of where your income is going, you will be in a much better position to weather the ongoing storms: prioritising essential spending, balancing discretionary treats, committing to secure savings.
The 50-30-20 budget method makes it easy to apply to a variety of different incomes, but some people may find their spending is more like 70-20-10. The key thing is to follow one method that is manageable for your household finances. If your situation, or choices, around where you spend and save don’t follow the 50-30-20 rule, the framework at least provides a good reference point to keep a check on spending and make sure you keep an eye on the future.
Crafting a secure financial future often requires short-term sacrifices. It is often shocking to see on paper how many ‘wants’ creep into our lifestyle. The willingness to make calculated sacrifices today sets the stage for greater financial freedom tomorrow, shielding you from the pitfalls of overspending and undersaving. Remember, these changes don’t have to be forever, just until you have more disposable income to add back in the money for spending on luxuries.