One thing that’s bothered me since deciding on this resolution was how to let people know how I’m doing with it. With the ones I’ve chosen over the past couple of years I’ve tried to post monthly (ish) reports on how things were going and what the next steps were. The problem with this year’s resolution is that a lot of people tend to feel a bit iffy when people go in-depth about their finances. The only person I’ve ever heard of doing it well would be Pat Flynn, but that’s far more detail than I’d ever want to publicise. One of the techniques which I’ve heard for saving before Christmas was something called the 50/30/20 rule to split up where your money should go each month. If you’re already familiar with this, you can skip down to the bottom, but if you don’t it works a little like this:
The 50/30/20 rule
- Essentials (50%): Rent, bills, weekly shops, commuting. Anything which you need to survive and function. Everyone needs to pay their bills and eat, but do you really “need” that new coat to get through the week? If you don’t, it belongs in the next category.
- Lifestyle (30%): Takeaways, meals out, video games, cinema trips. Anything which you don’t need to survive, but you want so you can live life in a way that you enjoy.
- Savings (20%): Paying off debts, overdraft fees, pensions, investments and savings. Everything left over after the other two categories should go here.
It’s only a rough guideline and not a strict budgeting method, and it doesn’t help to curb your spending unless you use it with something a bit more detailed. But it does help you figure out which areas of your life you should look into cutting back.
If your Essentials go over 50% you’ll want to look at what you’re spending on bills and food. Everything needs to eat, and most people need a home internet connection to go about their lives, but they don’t often “need” a premium 80Mb fibre-optic line, or smoked salmon for breakfast every morning. In the more extreme cases you might want to look into ways of reducing your bills to more manageable levels, or even moving to more affordable housing if you’re living far beyond your means.
Lifestyle’s a bit easier to work on. A meal out here and there, or the occasional new game might not seem like it would break the bank at the time, but you’d be surprised at how much these stack up over the month (I certainly was). A couple of meals out, a cinema trip and a new game within a couple of weeks can cost £100 without if you’re not careful effort.
Savings is a little more tricky. In theory this should go towards paying your way out of debts as well as money that goes into your pension and other investments, but in my opinion debts due to lifestyle choices, eg. a new laptop that you’re paying off in monthly installments, should still go into the Lifestyle section. This depends on your current situation though, and it might be easier for some to put all loan payments, overdraft fees, etc here. In my case though I don’t have much in the way of ongoing debts aside from a student loan, so everything here will go towards workout of my overdraft first, then worrying about things like pensions, savings and other long-term investments later.
What I’ll be doing
At the start of every new month I’m going to write a short report on how well I’ve done over the past month, with a focus on each of these 3 categories. Rather than talking about exact figures, I’m instead just going to list what proportion of my income ended in each bucket and why I think it went so well/bad that time around.