How to streamline your budget with 50/20/30?
The 50/20/30 budgeting guideline was first introduced by the Harvard bankruptcy expert Elizabeth Warren - one of TIME Magazine’s 100 Most Influential People in the World - and her daughter, Amelia Warren Tyagi, with whom she coined the popular term.
50/20/30 means that 50% of your income is allocated to essential expenses, 20% to financial goals and the remaining 30% to lifestyle, flexible spending.
We’re big fans of this budgeting plan at Vestpod - it serves as a great benchmarking tool and is simple and efficient. By allocating your net salary to three pockets of spending, you have a clear idea of where your money is going whilst taking care of your savings.
For this exercise we’ll be using your post-tax income, i.e. the amount of money you receive after your tax is collected. If you are are a freelancer or a contractor you need to make this deduction yourself - you can use a net salary calculator, it’s a pretty nifty way to get started.
50%: Essential Expenses
Sit down and take a look at your bank statements. Make an evening of it - compile all your essential expenses in one list, which can include the following:
- Rent or mortgage payments
Again, these should not exceed 50% of your monthly income. For example, if you earn £2,500 net a month, you should not be paying more than £1,250 for your essential items. And in London, this is especially difficult to do.
20%: Financial Goals
Whether or not you’re already saving 20% of your income, there’s no better time to start than today. Keep in mind that financial goals and savings can come in different shapes and forms:
- Repaying debt. Please note that all the minimum payments on debts (such as minimum credit card payment, mortgage, student loans) should be accounted for in the essential 50% category
- Emergency, short-term savings account
- ISAs/ other types of longer-term savings accounts
- Retirement funds and pensions
30%: Lifestyle Choices
Woop! Now that you’ve sorted out your essentials and savings (aka, the boring bits), you can focus on treating yourself. Whether you’re a shopaholic or a sports enthusiast, your 30% of lifestyle spending can cover a range of things:
- Charity donations and gifts for your loved ones and friends
- Shopping - clothes, household items and electronics
- Concerts, theatres, and other forms of entertainment
- Dinners, cinemas and gallery visits
- Travel, sports and beauty treatments
The list is really endless! 😉
Some examples of proportional budgeting
Please note that the sample calculation below is provided for informative purposes only.
£50,000 Annual Income
= £36,467 Annual take-home income for the tax year of 2016-2017 (after income tax and national Insurance)
= £3,039 Monthly Take-Home Income
£950 Rent/ Mortgage
= £1,520 Total essentials
50% of Take Home Income (make sure it is <50%)
£0 Debt Repayment
= £607 Total Financial Goals
20% of Take Home Income (make sure it is >20%)
£50 Internet & TV
£50 Charity & Gifts
£200 Going out
£212 Sports, travel
= £912 Total Lifestyle Choices
30% of Take Home Income (make sure it is <30%)
If you have a partner and are both earning, you should take both sets of income into account - giving you more leeway. Go get started on your 50/20/30!
Credit photo: Unsplash - Jimi Filipovski