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If you’ve ever sat looking at your bills and bank statements and wondered ‘how do I budget?’ then I have the perfect answer for you! The 50/20/30 budget rule totally changed my finances (and my life) and it can change yours too.
I find it mad to think about it now, but no one ever taught me how to look after my own finances. I had to teach myself using the University of Google.
I think back to those halcyon days of sitting in a soporific maths classroom at school, the teacher scrawling quadratic equations or whatever on the board and droning on about x this and y that.
Don’t get me wrong, these turned out to be useful for certain aspects of my job where I have to read squiffy investment graphs and charts. But it never really helped me learn how to check my council tax bill. Or what to look out for in my car insurance renewal. Or even just how to ensure my money does not run out before payday every month.
No, it was the University of Google that ultimately helped me with those things. I’d like to think I’ve got my personal finances on pretty tight lockdown now. Things are more or less automated and managed.
But more than any one hint or tip I’ve learnt, it was stumbling across the 50/20/30 budgeting rule that revolutionised my personal finances. So, what is the 50/20/30 rule?
This budgeting ‘rule of thumb’ is designed to give you a set of benchmarks for how you should use your salary each month. The rules break down as follows:
50% of your income should go on fixed costs. This includes things like rent or mortgage payments, car insurance, utilities, like gas and electric, and such. All the bills where you know how much they will cost each month and can be planned for in anticipation. If your fixed costs come to more than this, then it might be worth taking a look at your outgoings to see where you can make some savings.
20% of your income should go to savings or debt servicing. This is pretty straightforward. If you don’t have any debt, 20% of your salary goes straight into a savings account, pension or ISA. If you have debt, this should be prioritised starting with whichever debt has the highest interest cost. Note the rules are for salary after tax, so don’t think you can include your workplace pension contributions as part of the 20% – that’s extra added value.
30% of your income goes on anything else. This includes food, clothes, games consoles, CDs, takeaway coffees and such. Basically, anything that is a fluid cost that changes one day to the next. These are the rules as I stick to them, but there is conjecture as to what fits into what category. For instance, some people will tell you that minimum debt repayments should be considered a fixed cost rather than a savings/debt portion. Personally, I don’t do that because, while I always make the minimum payment, I also like to use the 20% to overpay my debt as much as possible, but it’s up to you.
I have to say as much as it seems like a pretty basic habit, finding out about this methodology totally changed my finances. Before I would spend randomly and regularly find myself short at the end of the month.
This has also totally overhauled my money because it introduces personal accountability to my spending
Instead, this approach has forced upon me an utterly rigorous process of accounting for my pennies. I even have a spreadsheet now that I update regularly to keep tabs on costs and what is going where. This has also totally overhauled my money because it introduces personal accountability to my spending.
The process ultimately turned me from someone who routinely dipped into a credit card to get by, racking up debts in the process, to someone who saves nearly half of their salary every month.
This rule got me started and pulled my money into control. Now I live with my girlfriend and we split a lot of the bills, my fixed costs are actually much lower and my budget looks more like 33/45/22. But I still wouldn’t be able to save so much each month were it not for the careful planning the rule has forced upon me.
The fundamentals of it hold true. Getting to grips with your money and setting rules for yourself has a huge impact on how you think about your monthly pay. It especially helped me in my first few years living in London where my spending got out of control at times. It goes from being a lump sum that you spend at will, to a carefully executed plan of action to follow and adapt to your changing needs. So, if you’re not budgeting already, get started right away. It is now more important than ever in these troubled times.
Edmund Greaves is editor of Mouthy Money. Formerly deputy editor of Moneywise magazine, he has worked in journalism for over a decade in politics, travel and now money.