Whilst the 50/20/30 rule is a great rule of thumb for those beginning their budgeting journey – whether alone or together – sometimes as a couple there are other factors you need to take into account in order to build a budget that suits you both.
The following steps should help you do just that.
Step one: Asses your net income
First thing’s first; you need to know what you’re working with. If you are a two-income home then obviously add up your salaries after tax and automatic debt deductions (such as student loans).
If one or both of you are self employed, or have an irregular income, then take the average of your past three month’s earnings as your working figure.
Even if you are not paying into one central bank account, you need to understand how much money your family is earning in order to make budgeting decisions.
Step two: Define what are essential and non-essential costs
You need to identify every single spend that your household makes and agree whether they will be categorised as essential or non essential. Things like rent will always be an essential cost, but others, such as cable TV or Netflix may be more contentious. Importantly, once you have categorised each one, they need to remain in that category.
Having a financial app that tracks all your spending can really help with this step. Seeing every penny categorised and displayed in an easy to read format that you can compare month on month can really crystallise in your mind where your money is going.
Once you have agreed which costs are essential and non-essential you can ascertain what changes you need to make to your lifestyle in order to obtain a healthy balance between your savings, investments, and the costs of your everyday life. If you are not sure of how much of your salary should go towards each category, this is where the 50/30/20 rule can come in useful.
Step three: Identify your long and short-term goals
Once you’ve established what’s coming into your home and what you need to spend on essential costs you will have a better idea of what you have left to save. You need to identify exactly what your financial goals are for the long and short term. You may want to work towards buying a house, save for retirement, or go on holiday. Each goal needs to be agreed on and budgeted for.
You will need to decide how much money you put toward each separate goal on a monthly basis, and which are your top priorities. It is recommended that you automate your savings and that you open separate bank accounts for each savings goal in order to keep better track of your savings.
For long-term savings such as retirement, you may even decide to pay into a long-term investment fund.
Step four: Establish how you will divide payment responsibilities
Depending on how you arrange your finances – whether all your finances are combined or you just have a household account for joint bills – you can divide up how each of you contributes in a number of ways.
You can keep it simple and divide all costs 50/50, or choose to assign different bills to each person so that they take responsibility for the payment and management of each account. Alternatively you can choose to divide payment in terms of percentages of your income.
For example: if one of you earns £1,000 a month and the other £3,000, and your monthly rent is £1,000, then you would split the payment into £250 and £750. This means that both of you would have contributed 25% of your monthly income to the rent. For couples with large earning discrepancies this can create a “fairer” financial environment.
Step five: Schedule monthly meetings
Now you know your essential outgoings, your saving priorities, and what you have left to spend on non-essential “fun” each month, you are in much more control of your joint finances.
However, by scheduling monthly budget meetings you give each other the opportunity to air grievances, make changes to the budget, and fine tune it until it works perfectly for you. It also stops you getting lax and losing control of where your money is going.
Your budget should change as your life does, so make sure to update it each month to reflect any significant financial changes that may have happened.