Having a spending and savings plan can help you understand what income you have, what needs to be allocated to everyday living expenses and what you can put towards future goals. With groceries, fuel and energy costs rising significantly, for many people, essential living costs now represent a large majority of take-home pay.
The 50-30-20 framework has traditionally been a popular rule of thumb to follow for budgeting outgoings and savings.
The idea is that you allocate your total income as follows:
- 50% on current ‘needs’ (essential living expenses): food, transport costs, mortgage/rent, utility bills, essential clothing, minimum repayments on debt balances.
- 30% on current ‘wants’ (non-essential luxuries): discretionary spending such as gym memberships, eating out, trips, subscription services.
- 20% towards future savings and debt repayments: putting money aside for unexpected financial emergencies, saving for future goals, investments, pensions, debt overpayments.
So does the 50-30-20 rule of thumb still apply in the current climate?
According to budgeting app HyperJar, a new approach of 70-20-10 should be adopted to allow for a much higher proportion of take-home pay to go towards essential purchases, with 20% allocated to non-essential spending and a much lower proportion of 10% towards emergencies and future goals.
It’s clear that you can’t simply sacrifice spending on essential needs, but it is still important to ensure that you’re optimising what you do spend on these bills, although with things such as utility suppliers, shopping around has become unachievable in the current climate.
The next step would be to consider wants – are there things you could do without? This could be cancelling subscriptions or deferring spending on luxury items in the short-term. Such changes may not need to be permanent.
Having the discipline to cut back non-essential expenditure is no easy feat, and it may be tempting to instead reduce outgoings towards future savings and debt repayments.
Lowering this expenditure can have a significant impact on finances both now and in the future:
- Cancelling regular savings
This may seem an obvious option to free up additional cash, but this means you’re likely to miss out on future goals beyond the immediate future.
- Paying off only minimum balances on debt
Paying off the minimum payments means you’ll end up paying for in interest payments over the lifetime of your debt. This means less money to spend on the things you enjoy (both now and in the future) as more of it is going on unnecessary interest payments.
- Reducing pension contributions
Missing out on the benefits of compound interest/growth can significantly lower your pension savings over the long term.
- Using your emergency fund to fund other expenditure.
If something unexpected happens and you don’t have a cushion to fall back on, you may need to resort to credit cards or loans which will ultimately cost you a lot more over the longer-term
- Cancelling protection policies.
This is something that’s particularly at risk. Many people don’t see the benefit in paying for protection, as they don’t receive anything tangible for it. However, protection premiums should ideally be grouped in essential expenses. Before taking any action, ask yourself “What would happen if I cancelled this policy and an event occurred that meant I lost earnings/passed away. How would the sum assured be replaced?”
Ultimately, there’s no one-size-fits-all approach when it comes to budgeting. It all depends on your personal circumstances and financial goals. However, the key to being financially secure starts with being able to understand your spending on needs and how much this leaves for everything else so you can be disciplined in saving for your future goals.