If you’re struggling to save any money at the moment and you could use a little budgeting advice then you’re definitely not alone. Recent figures show that the savings ratio, an indicator of how much households have available to save as a percentage of their disposable income, fell to its lowest level since 1963 in the fourth quarter of last year.
The ‘Savings to income ratio’
This is the proportion of your income which is ‘saved’, usually shown as a percentage of the total income amount. For example:
Monthly income (e.g. your salary after tax) = £2000
Savings from salary = £400
Therefore your savings to income amount is 20%
The savings ratio stood at 3.3% at the end of 2016, down from 5.3% in the previous quarter. Against a background of rising fuel and food prices, the drop suggests that people are raiding their savings in order to cover day-to-day living costs.
This was the main driver behind the last recession, so should be a cause for concern. It also means borrowing, and therefore consumer debt, is likely to increase – and an increase in the use of credit cards and loans to cover expenses is another worrying sign.
It might seem contradictory, but people don’t necessarily save more when the economy is performing well. Often, it’s during periods of economic uncertainty that more is put more away for a rainy day, primarily because of concerns over job security.
Budgeting help isn’t always on hand and having the discipline to set money aside each month can be hard. We all tend to spend what we feel we need to in order to get through the month, and if there’s something left over, then great. But more often than not, sometimes we all find ourselves trying to last out until pay day.
The 50/20/30 rule
One very simple way to budget is to follow the 50/20/30 rule. This means dividing up your income into three chunks, with 50% being allocated to essential items, 20% being kept back for savings and 30% going on living your life.
The main benefit of the 50/20/30 rule is that it’s easy to follow; there’s no need to divide up your spending into lots of different categories, simply keep the rule in mind when looking at your monthly finances, and you’ll always have a rough guide to whether you’re spending your money in a sensible way.
So on a salary of £2000 a month, after tax, this might look like:
The 50% essentials
When it comes to the essentials in life, you might decide that you can’t live without the gym, contact lenses, a mobile phone contract or a certain broadband speed, whereas other people might happily categorise these as optional extras. If you do consider these types of things essential items, then at least following the rule will make you think hard about what is really essential and what isn’t, or if there’s a cheaper way of achieving the same result.
Our top tip!
Whatever you consider essentials, try and keep whatever you spend in this category to 50% of your income and bear in mind that if you really can’t live without the gym, for example, you may need to find ways of economising in others areas, such as where you do your food shopping, in order to achieve that 50% target.
20% for planning ahead
Budgeting experts differ on how much they recommend you should be squirreling away, but they all agree that building up a ‘buffer’ of savings, in case of problems with cash flow or for unexpected events, is always a good idea.
Think carefully about what might be a good amount to save in order to cover your own outgoings if your incomings take a hit. For example, to cover a temporary cash flow problem, you may only need a couple of weeks pay – so, on a monthly salary of £2000, this would obviously amount to around £1000.
Our top tip!
For emergencies, which might include being made redundant and having a period of job-seeking for example, experts recommend a minimum of 3 months’ pay kept in reserve. Using our example of a £2,000 salary, this would mean a ‘buffer’ of £6,000.
And remember that if you have credit card debt, you’ll almost certainly be better paying this off, and then keeping the card for emergency use, than you would be putting money into a savings account, given the respective interest rates paid on savings and charged on credit cards in the current market.
A 30% lifestyle
The remaining 30% of your budget is most likely to include expenses that you didn’t include in your ‘essentials’ category, such as:
- Gym fees
- Broadband service
- TV provider and streaming services
- The latest mobile phone
- ‘Treats’ like meals out and trips away
- The cinema
- Music concerts and gigs
Our top tip!
Your budgeting (and what spending goes into each category) depends what you consider to be essential and what you feel you could live without.
It’s important to examine which of your outgoings and which are necessary – this will help you hit your monthly targets for the other two categories.
And ultimately, that’s the key to successfully using the 50/20/30 rule. As well as dividing up your outgoing into the three categories, think about them in priority order.
Essentials (50%) come first. Then make sure you’re putting enough away (20%). And then think of whatever‘s left (30%) as yours to spend as you wish, to support the lifestyle you want.
And who knows - if you have a quiet month, you may even find yourself adding a little more to your savings pot than you planned.
Could you do with some help to work out your savings plan? Try our Personal budget calculator.