The feeling of doing something about your debts can bring overwhelming confidence...
Super-charge your finances with the 50/30/20 rule!
Ever feel like you need to go to budgeting boot camp? Do you find yourself staring dumbfounded at your bank statement, wondering where all of your money went last month?
Our friend Alice from Magic Freebies popped by to talk about the 50/30/20 rule, and it’s a game-changer!
Let’s face it, budgeting can be boring at first. However, it’s an essential process if you’re determined to keep your spending in check.
The beauty of the 50/30/20 rule is that it gives you a wonderfully neat framework for organising your money. As for the timeless mystery of ‘where the chuffin’ ‘eck did my money go?’, you can fret no more, friends. The 50/30/20 rule has you covered!
How does the 50/30/20 rule work?
Financial expert Elizabeth Warren argues that if you can allocate:
- 50% of your monthly income to essentials
- 30% to leisure and
- 20% to savings
Then your finances are healthy.
Of course, this is easier said than done. With the cost of living rising all the time we must be vigilant for new and creative ways to cut costs and make ends meet. So without further ado, let’s get started!
Divide and conquer your outgoings
The first step is to figure out what your current outgoings look like. Simply split your monthly outgoings into these three segments – essentials, leisure and savings.
Once you’ve done this, divide the totals by your monthly income (after tax). and convert your numbers into percentages. You can do this in Excel, or by using this online percentage calculator.
Chances are, your savings are most likely being neglected and you’re either overspending on your essential living costs, leisure and the odd guilty pleasure (hey, that rhymed!).
Next, we’ll look at what to do when you’re overspending in these departments.
What to do if you’re overspending on ‘leisure’
It’s so easy to overspend on the things that we enjoy. Life can be tough and full of obligations, so why shouldn’t we buy that Friday night takeaway, 27th pair of shoes or cheeky happy hour cocktail?!
Remember that story about the ants and the grasshopper? The original fable by Aesop tells how the grasshopper was all about having fun in the sun and gave little thought to tomorrow. He even laughed at the ants who stored their food for the cold winter ahead (what a jerk!).
When winter finally came, the starving grasshopper had nothing to fall back on, while the ants had wisely stored enough food to get them through tough times (hey, I didn’t say it was a cheery story…)
The moral is this: too many short-term pleasures can damage your long-term goals and wellbeing.
You might identify with both the grasshopper and the ant, and that’s great! You absolutely deserve to have fun, laughter and treats in your life, but you’re also savvy enough to know you need to prepare for the future. Why else would you be on this blog?
The 50/30/20 rule can help you be both the ant and the grasshopper. An…anthopper? Let’s not linger on what such a creature would look like, eh?
There are so many habits you can adopt to ‘be more ant’. Here are just a few ideas to get you started:
- Set yourself a rule that you’ll only eat at a restaurant if you have a voucher. You could also try dining at off-peak times of day to snap up the best deals.
- Keep an eye on your favourite shops and make a ‘money-saving calendar’ of all the seasonal sales. Next time you’re tempted to do some window-shopping, check your calendar and hold off until the next sale is due to start.
- Employ the ’30-day rule’. If you spot an item that you like the look of, try and leave it for 30 days and if you still need it, buy it! If you can go a whole month without something, is it really a necessary purchase?
- Have a batch-cook day. It can be boring (unless you love cooking) but spending a day batch-cooking meals can be ideal for curbing the urge to order takeaway when the fridge is barren, as you’ll have meals that are nutritious and ready to eat. Even one less takeaway every month is good for your savings!
- Apply for free stuff through freebie websites. Beauty, home, food beverage companies run sample giveaways to raise brand awareness and get their products in the hands of consumers. Not only can you find sample giveaways, but you can even get full-sized products! Tester panels are also great methods for getting your hands on freebies. It’s also worth searching Facebook for closed freebie groups – you’ll find loads of insider tips to help you find the best free stuff.
- Always make online purchases through cashback websites, such as TopCashBack or QuidCo. You can then withdraw your cashback either as cash, or as vouchers for certain businesses. If you withdraw the cashback as a voucher, you might even get a little increase!
- Make the most of free and fun stuff. Whether it’s checking out a free art exhibition or having a picnic at your local park, filling up your diary with free events can be fun and fantastic for your wallet.
What to do if you’re overspending on ‘essentials’
This is the most frustrating category to overspend on. We have the least control over our essential outgoings, yet they’re often the most expensive!
Split out all the big essentials like so:
Add up what you’re spending on these to reach the total sum, then divide each by the total to work out the percentages.
Naturally, your rent or mortgage will probably have the highest percentage. However, it’s still useful to see the breakdown of where all your money’s going. If a percentage is slightly higher than you expected – consider shopping around for a better deal.
It’s common knowledge that energy providers and phone companies only offer their best deals to new customers. You have two options here. You can either:
- Use a verified comparison site to see if you can save money by switching utilities, or
- Visit IsMyBillFair.com to check if you’re being charged unfairly compared to your other provider’s customers. If you are, then you’ll be given the tools to challenge your provider and hopefully get your contracted reduced!
It’s also worth looking into what the average household in your area spends on Council Tax and rent, because cost of living can vary greatly depending on where you live. If you’re spending over the average in your local area for your then consider re-evaluating these outgoings. For instance, you could:
- Challenge your Council over your Council Tax bill, and see if you could switch to a cheaper band (this can backfire and get you placed in a higher band however, so make sure you do your research!)
- Get a water meter, which could save you hundreds of pounds on your water bill
- Buy own-brand food and household products instead of expensive branded items that are essentially identical in ingredients
Last but not least – what about the savings?!
Whether you’re saving up for that big holiday, a rainy day or a home to call your own, this is what the 50/30/20 rule is all about. Once you get into the habit of putting aside 20 percent of your income into a savings account, it’ll soon become second nature.
Not sure how to get the ball rolling? The following tips can help:
- Try a fun savings challenge, such as the 1p savings challenge as tried and tested by Charley from the MoneyAware team
- Use jam jars to save your money. You can label each jam jar with a goal, such as ‘pay off my debts’, ‘Christmas presents for the kids‘, or ‘anamatronic, man-sized japanese spider crab’. Dream big! Live your best life!
- Use apps that round up your transactions to the nearest pound and puts it in a savings pot. Debt advisor Ciaran is a big fan of Monzo, for instance.
- Sell your clutter online and then put your earnings into a savings account.
Has the 50/30/20 rule worked for you? Do you have any budgeting tips to share? Let us know all about it in the comments!