How to budget with the '50/30/20 rule'

What is a financial budget?

Budgeting is the act of dividing up a limited resource.

When we think about budgeting in the context of personal finances, it’s really the process of managing income and expenses.

A budget helps you organise the way you allocate your money so that there’s enough to cover immediate bills, and you also include provision for your future self and any children that you already have or may plan to have 🌱

Why a budget is important

Creating and sticking to a budget is a key life skill and an essential aspect of money management that can help you achieve your financial goals.

The benefit of budgeting is that you shouldn’t run out of money when you need it, which also means less stress!

A budget helps ensure you don’t get into debt, and by paying your bills on time you can also build a healthy credit score and get access to better rates on personal loans or mortgages in the future.

Budgeting can feel difficult because it’s human nature to prioritise short-term gratification over longer-term priorities. That’s a scientific fact 🤓

However, there are also some ways you can use science to boost your budgeting willpower too, which we'll come onto later in the article...

What is the 50/30/20 Rule?

The 50/30/20 rule suggests that your take-home income (after-tax income) should be divided as follows:

• 50% on needs (housing and essential transport and food costs)
• 30% on wants (lifestyle choices like holidays and eating out etc.)
• 20% on your future (clearing debt and growing your money)

How to budget with the '50/30/20 Rule'

Step.1 Record

Track your average income and the fixed expenses that you know you’ll need to cover with that monthly income 📊 Even if you get paid weekly it’s easiest to work out your budget over a month, as this is how most bills are paid.

In addition to monthly bills, you’ll also need to account for less regular annual expenses, like car insurance/maintenance and yearly subscriptions.

Top budgeting tip 💡

This is a great time to identify where you can make immediate savings from your regular payments. You could cancel unwanted subscriptions or compare bills and switch suppliers to reduce the cost of your household utility bills.

Step.2 Prioritise

Having built an understanding of your earnings and spending you’ll now need to allocate money for your needs, wants, and savings.

The amount you assign in each category is up to you, but a common budgeting rule-of-thumb is the ‘50/30/20 Rule’.

Top budgeting tip 💡

Setting goals for your saving targets can actually help you achieve them quicker. It’s important to have room in your budget for some fun money, but giving yourself a specific aim can encourage you to stay focused on saving.

Step.3 Automate

Once you’ve figured out your budget, you’ll need to apply it. Tackling your financial accounts to create a spending and savings plan is a rewarding process… but probably not something you want to repeat every month 🤓

To automate your budget, set up standing orders to separate out savings from spending money, and create Direct Debits to pay your bills on time.

Top budgeting tip 💡

Standing orders are fine for fixed payments, but not so good when it comes to accounting for varying amounts, based on your spending. You can use the free version of an app like Plum which automates additional savings too!

Tips for sticking to your budget

Setting a budget is a great start if you’re serious about saving money, but good intentions only go so far when temptation comes calling.

If you need a helping hand, here’s how to stick to your budget:

Tip.1: Pay yourself first

When it comes to saving money we all face our own particular challenges, but one thing is universal… life always finds a way to interfere!

It’s essential to save when you first get paid by immediately transferring the money out of your current account and into separate savings accounts. It’s easier to manage your finances when you can see how much you have to last until payday. And you might be less tempted to dip into your savings 😈

Tip.2: Track your spending

No matter how disciplined we are, there are always spending urges we struggle to control. Resisting impulse buys is a key part of the budgeting process, and one trick that might be able to help is the ‘30 Day Rule’.

The idea is that if you’re tempted to make an unplanned purchase, you walk away from the situation and make a note of the item, price and date. You can then revisit the decision later and avoid buying something you might regret.

Tip.3: Make your money go further!

Getting to grips with financial planning to create a budget can be laborious, but thanks to Open Banking there are financial products available that use the latest technology in an app to simplify the process for you.  

For example, Plum is a free budgeting app, regulated by the Financial Conduct Authority (FCA), which can help you budget by providing a real-time view of your spending across all your bank accounts and credit cards.

The app automatically gives you an adjusted balance, which takes into account any regular payments due before your next payday, and there’s a money dashboard you can use to track and compare your spending.

Check out our website to learn more about Plum's budgeting features.

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