Many busy professionals have some degree of flexibility with working hours and the work-home balance. This is a great lockdown innovation, but it hasn’t reduced the time pressures to commit to a profession or career.
The cost of living is also on the increase – not just basic necessities like utility bills, but rents, mortgages, commuting, nursery school and even the lunchtime snack. Time, and money, are being squeezed. Budgeting and balancing your domestic finances can be a struggle at the best of times. And to be fair, it isn’t the most fun thing to do at the weekend, is it?
There is a rule of thumb that can help to simplify your life.
The 50 / 30 / 20 budget
Before I explain the 50/30/20 budget I need to make it clear that you need to always reference your net after-tax income. Forget the gross number because it isn’t relevant.
Of the money, which is yours each month, allocate 50% to the ‘Essentials’ category – that means Council Tax, rent or mortgage, commuting costs, insurance, utility bills, food etc. Put bluntly, not many people get any joy from their essential spending. Essentials mean that if they don’t get paid, you are quickly in trouble.
The second category is ‘Discretionary’ spending, and you can allocate 30% of your net income to this. This is for gym memberships, weekends away, nice clothes, dining out or takeaways in, cinema and theatre trips, hobbies. You know they are discretionary because they can be paused at any time. Most people do get joy from their discretionary spending. Which is the reason why it can often run out of control. Personal discipline is key.
The third category is ‘Your Future’ where the final 20% of your income is allocated. This is for your pension pot. Your ISA savings. The mortgage overpayments. Or your debt reduction. It is all too easy to survive day to day without looking ahead. And this is a mistake.
If you are a young busy professional you have two free SUPERPOWERS to help you. The first of these is TIME. Your savings and investments can be over decades, not years. The second superpower is compound interest. Which is essentially growth on previous growth. And when compound interest is combined with time, the effect can be magical.
Let’s take a simple example of £10,000 over 30 years with simple interest (like a bank deposit) at 7% (wouldn’t that be nice nowadays?) You would get your £10,000, plus £21,000 of interest, making £31,000. The same £10,000 at 7% compound would produce £81,164. That’s over £50,000 more.
In summary, it is simple: 50/30/20 and try to start now. There is no better time.