How your finances should all add up
Doing a few simple sums and knowing what percentage of your income should go where is the secret to a useful DIY money health-check.
You might think that the best way to get rich quick is to publish a get rich quick guide. The marketplace is full of people trying to sell you products, schemes and systems for managing your money, and it’s easy to be caught like a rabbit in the headlights, facing this onrush of overcomplicated information with a sense of helpless dread. But really, making your books balance is very simple.
How the 50/30/20 rule adds up
Just like the four-word diet plan (‘eat less, move more’) that ought to have put every food guru out of business long ago, there’s a six-word money rule that tells you everything you need to know: Don’t Spend More Than You Earn. Unfortunately, like dieting, being sensible with money is easier said than done.
Partly, it’s about getting yourself in the right frame of mind to begin with. But mostly it’s about having a plan.
Luckily, there’s a simple secret that money-savvy types have known for years: the 50/30/20 rule. In other words, you should be spending 50 per cent of your income on essentials, 30 per cent on desirables and putting 20 per cent away.
So how do you start?
1. Work out what half the family’s take-home pay is.
2. Then add up what you’re currently spending on all the stuff you don’t have a choice about: mortgage, food, clothes and utility bills. Don’t be surprised if the two figures don’t quite match: if there’s a shortfall, you’re going to have to get creative on your budget for things like food and clothes, and think about switching providers for gas and electricity to get a better deal. Be prepared to be a bit brutal with the whole family on this one: sorry, but no one will actually die if you lose that satellite TV subscription or gym membership.
3. Okay, that’s the tough bit done. Next, allocate the 30 per cent you’re going to spend on quality of life. This is where you’re going to put all the luxuries you’ve just prised out of the grasp of your nearest and dearest – but don’t forget to include some nice things for yourself! Remember, once this slice of the budget is gone, it’s gone, so the whole family is going to have to prioritise and compromise a little.
4. Finally, the bit no one really likes, but is the secret that will give you a lovely warm glow in the long run: the 20 per cent you’re going to kiss goodbye to (for now). Use this, firstly, to pay off debts, starting with the most expensive. Debts all paid? Well first, award yourself a pat on the back and a decent night’s sleep at last, then open the best savings account you can find (don’t expect vast amounts of interest at the moment, but try to get something) and squirrel that 20 per cent away for luxuries, holidays and the inevitable rainy day. Sorted!
Super Savvy Tip: If you’re running a long-term credit card balance, you should treat this as a financial emergency and talk your bank immediately about switching it into a loan.