The 50/20/30 financial diet: My first foray into crash budgeting

18 September 2017

I’ve never been one for trying out a ‘one size fits all’ budgeting plan. But being a young person living in London; not having a budget can be crippling.

Then I heard about the 50/20/30 personal budgeting method, and I was intrigued to see if it worked.

The premise of the 50/20/30 budget is simple:

  • 50% of your earnings should go towards fixed costs. This includes rent or mortgage payments and household bills.
  • 20% of your earnings should go straight into savings - a pension pot, Isa or similar. If you have debts, this portion should be prioritised to paying it off before saving. If I had a penny for every money blogger who has told me to pay off my debts first, I probably wouldn’t have debts anymore.
  • 30% of your earnings should go towards variable costs. Such as food, clothing, McDonalds.

The 50% element: What is a fixed cost?

The initial step I took was to work out my fixed costs so I could apportion the rest of my pay packet. This forced me to consider what a fixed cost really was.

Before using this budget plan, I would pay day-by-day to travel the Tube and bus in London, treating it as a variable cost. But in fact, it made more sense to treat my travel as a fixed cost and start buying a monthly travelcard. This saved me my first £6 (per month) of the exercise, and meant I could travel as much as I wanted within zones one and two.

But as it turns out, my overall fixed costs are higher than the 50% required - 4.6% too high to be precise. And of the three segments of spending, I have found this portion the most difficult to cut.

I am unwilling to forgo my Netflix subscription, for example. However, it does keep me out of pubs and is therefore probably overall more economical.

The vast majority of my fixed costs meanwhile goes on rent. I live in Brixton, which is an area of London that is increasingly unaffordable as more well-to-do millennials move in.

My rent covers all the bills for the house (gas, electric, broadband, water, council tax). I assume my landlord makes a profit because he has some rather fetching solar panels on the roof, which also might be why the upstairs shower can never hold a hot temperature though.

While this makes my life easier because I don’t have to deal with paying bills or switching providers, it probably doesn’t help me get the best deal.

The 20% element: I don’t tend to save any money

One of the main reasons I decided to try this financial “diet” is that I don’t tend to save any money, and would really like to start. My pension contributions are miserly, and yes, I have credit card debt.

Dealing with my credit card debt was actually quite daunting, but once I had faced it head on it felt very relieving. For no particular reason I had racked up debt on a card and not really paid it off properly other than the minimum payments.

What I did as part of this challenge was to apply for a balance transfer card in order to ensure the debt stopped accruing interest for a while. I then set a timetable for paying off the balance to ensure the whole debt was paid in full at the end of the interest free period.

It is frustrating knowing so much of this portion of the budget is going towards paying down debt alone. My goal is to try and save for a deposit for a house, and that still feels a long way off, but this is a start and just by reorganising how I pay, I have been able to make significant savings.

The 30% element: The introduction of packed lunches

When it comes to variable costs my weakness is always buying sandwiches from the supermarket next to the office for lunch. The temptation to buy a drink, a pack of crisps or chocolate bar is as bad for my waistline as it is my wallet. So as part of my budget plan, I resolved to bring in packed lunches, to which I have stuck throughout.

And honestly, this has seen the most dramatic saving for me. Aside from a few other variable purchases - I bought a hand vacuum, because who doesn’t need a hand vacuum?! - I stuck carefully to my variable spending and came in well under budget. In fact, in total it came out as less than 20% of my wage. This actually enabled me to put more money towards the saving element.  

I still have a soft spot for takeaway coffee, but Moneywise’s office recently acquired a coffee machine which is keeping me in free, potent, caffeine doses.

So what have I learnt?

I have learnt a few things from my first month on the 50/20/30 financial diet. Those are:

  • London is a money-sapping playground, designed to part you with your cash.
  • Supermarket meal deals are a trick to get you to spend more money - homemade sandwiches really are the panacea for saving they appear to be.
  • Debt is scary, but making a plan and sticking to it takes away the psychological burden.
  • Fixed costs are hard to cut, especially if you don’t have control over decision-making.

All in all it has been a positive experience so far and I plan on sticking to the budget going forwards.

While I didn’t stick rigidly to the 50/20/30 mantra – it was more 56/26/18 – I now feeling like I am paying down a respectable amount of debt each month, and I’ve even been able to save a small amount too. Money that will now (hopefully) go towards a deposit on a home.

But perhaps the most important lesson I have taken is that categorising my money properly is the most important element to managing it well… and now I eat more delicious (and cheaper!) sandwiches too.