At this time of year many people start to plan ahead and think of the changes they might be able to make to help improve their current financial situation. The New Year offers a golden opportunity to wipe the slate clean, erase the mistakes of the past 12 months and start January with some realistic changes you can follow every day.
However, new figures from the Office for National Statistics (ONS) indicate that the cost of living is still putting pressure on household budgets. The Consumer Price Index (CPI) inflation rate was 2.6 per cent in the 12 months to November, the highest level for eight months, mainly because food and non-alcoholic drinks, alcohol and tobacco, clothing and footwear, recreation and culture all edged higher over the year to November, compared with the year to October.
This means that inflation has been above the Bank of England’s target for two months in a row. The Bank moves interest rates up and down to try to keep inflation at 2 per cent, and cut it twice in 2024, taking rates to 4.75 per cent.
While this might make for grim reading for the New Year, all is not lost, as one simple way to instantly take control of your finances and your spending is to follow the ‘50/30/20 rule’.
This budgeting method offers a quick and reliable way to get your finances on track – and stick to it. Katy Simpson, personal finance expert at Virgin Money, explains it step-by-step to help you decide if it’s something that could help you start the new year on the right financial footing.
Katy said: “The 50/30/20 budgeting method encourages people who can afford to split their income into three parts to do so. Following this simple method for budgeting will allow people the fun and freedom they want while still being responsible with their money.”
The 50/30/20 method involves putting aside:
- 50% for essential spending such as bills and food shopping)
- 30% for non-essentials such as eating out and style and beauty
- 20% – into savings
50% Essential Spending
Spend 50 per cent of your income on essentials such as housing costs, food and energy bills.
While it might be tempting to think about planning exciting activities throughout the year such as holidays, festivals and days out with friends and family, you first need to consider essential spending and any financial commitments and savings goals.
Katy explained: “Tackling those essentials enables people to have a better idea of how much money they have spare for saving and non-essential spending. Some may find that the essentials are taking up more than 50 per cent of their budget.
“In these cases, it’s always worth checking for any unnecessary spending that could be cut back on. For example, is that gym membership or streaming subscription being used enough to justify the cost right now? If not, consider pausing or cancelling the membership/subscription until it’s needed again.
“It’s also useful to check whether they’re paying more than they need to for essential bills. People should check their phone contract, if it’s running over the initial contract period and they haven’t upgraded, they might be eligible for a reduction on their bill. They can also shop around for providers offering cheaper deals on services like broadband or car and home insurance.”
30% Fun
Spend 30 per cent on the fun parts of life like shopping, takeaways and dining out.
Knowing what to spend money on is likely no issue but knowing which social activities to prioritise to help make money go further can be tricky.
Katy advises: “Try to get into the habit of being open about your finances with friends and family. Set boundaries, know when to say no and don’t feel bad for doing so.”
She added: “FOMO (fear of missing out) can be a big factor to navigate when it comes to plans, but to help Brits stay on track with budgeting and hit their savings goals, it will pay to prioritise the plans they really want to do.”
20% Savings
Put 20 per cent away for savings, long-term goals, paying off any debts or a future emergency fund.
The last part of the budget is kept for savings. Regular saving is important, whether it’s putting money away for something in particular or building a cushion for any unexpected spending in the future. Saving a little each month can go a long way.
Katy said: “Aiming to put 20 per cent of your income a month into a separate savings account is the ideal amount according to the method. Not everyone is able to stretch their finances to this, so instead, they should work out what they can afford to put away regularly.
“Little and often is still a valuable way to keep finances healthy ahead of winter.”
Katy also said that the 50/30/20 method makes it easy to apply to a variety of different incomes, but added that some people may find their spending is more like 70-20-10.
The key thing is to follow one method that is manageable for your household finances.