Budgeting made simple
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 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 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.
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.
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
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.