The #1 budgeting technique to get your 2020 money plans back on track

By Alice Merry

Is 2020 the year you plan to get rid of your credit card debt? Save for the trip of a lifetime? Or just feel more in control of your money?

What a difference a budget makes..

Many of us have big ideas for our money in the new year. However, without a plan in place, those resolutions may already be slipping away.

A budget could be your lifeline to get your money plans for 2020 back on track. A budget is simply a plan for how you will use your money. It is the best way to take control of your day-to-day spending – the key to achieving your long-term money plans.

The idea of following a budget might sound restrictive or overwhelming, but it needn’t be. There are plenty of techniques for budgeting and it’s worth testing a few to see which works for you. However, if you want to get your 2020 money plans back on track today, one easy technique you can use start using straight away is splitting your money into three “pots”.

The Three Magic Pots

The first pot is your essential expenses (your rent, phone or internet bill, food, bus pass etc.) The second pot is money put aside to achieve your money goals (like building up savings or paying off debts). The final pot is for flexible spending (such as money for a night out, concert tickets, or birthday gifts). This method was originally proposed by Elizabeth Warren and Amelia Warren Tyagi, who developed the 50/30/20 rule, advising people to spend 50% of their income on essential expenses, 30% on financial goals and 20% on flexible spending.

There is no need to rigidly follow this 50/30/20 split, which is certainly not realistic for everyone, what matters is deciding on – and sticking to – proportions that work for you. It is worth spending some time adding up your essential expenses, thinking about what you would like to put aside for your financial goals, and what that leaves for flexible spending.

Once you have worked out your own split, the important part is the order that you allocate the money. First of all, make sure you put aside the amount you need for essential expenses. Secondly, put into a separate savings account (or directly to paying off debts) the proportion you have decided to put towards your money goals. Then, you can use the proportion leftover for guilt-free spending, knowing that both your essential expenses and money goals are already taken care of.

There is nothing wrong with putting aside just a small amount for your money goals in the beginning. Perhaps you need 80% of your income for essential spending and decide to put aside 5% to paying off your overdraft or saving for a laptop, leaving 15% for flexible spending. You can always decide to increase the proportion set aside for your money goals later, if you find ways to increase your income, reduce your essential expenses, or are willing to allocate less to flexible spending.

Keeping it realistic is key 

To be able to stick to your budget, it’s important that it is realistic. There is no point coming up with an overly stringent budget and putting a chunk of your money into savings, only to end up having to spend into your overdraft or credit card because you underestimated your essential expenses. Think carefully about what you realistically need to spend each month and don’t be afraid to review and change the proportions during the first few months.

Finally, if you don’t manage to keep to your budget one month, don’t be too hard on yourself. You have already taken an important step forward by being honest with yourself about how you spend your money and how you would like that to change. As you get to understand your money habits better and adapt your budget over time, you’ll soon be sticking to a budget and be well on your way to your money goals.