How to budget like Elizabeth Warren

This article isn’t personal advice. If you’re unsure if a course of action is right for you, please seek advice.

Many of us have professional icons, people who started in the same place as you, then soared to greatness. For me, it’s Elizabeth Warren.

Before running for president, and being a fierce female political force, she wrote books about money management. But not just any books. Alongside her daughter, Amelia Warren Tyagi, the dynamic duo created one of the most powerful budgeting best sellers.

All Your Worth: The Ultimate Lifetime Money Plan hit the shelves in 2005 and it’s still going strong.

The book mainly focuses on one simple tip – the 50-30-20 rule.

• 50% is for must-haves
• 30% is for nice-to-haves
• 20% is for saving or investing

While there might be some who pick holes here and there, it’s known as one of the most powerful budgeting techniques of all time.

50% for essentials

Warren advocates that 50% of your household income should go towards things that you need. We all have different ideas of “must-haves”. But this pot is really just for the everyday essentials and costs needed to live. The list includes necessities like:

• rent or mortgage repayments
• food
• transport
• utility bills

According to the rule, if you’re spending more than 50% of your income on these, you might be spending too much. You could look at downsizing or cutting down somehow.

Making changes to where you live and how you travel could make the biggest impact on your budget. In the UK, a quarter of our household income is spent on our two biggest expenses – housing and transport.

In 2019, the average household spent over £4,000 on transport. So looking for alternatives here and there could make a big difference. For example, carpooling, working from home or cycling to work just one day each week could make a good dent in the transport costs.

30% for nice-to-haves

Be honest, before lockdown how much did you spend on a big night out? Across the UK, it seems that we love splashing the cash on fun evenings. A recent survey showed that on average we spend £69.64, making the night-time economy the UK’s fifth biggest industry. But what’s the right amount to spend? According to the 50-30-20 rule, we should aim to limit our fun and luxury spending to 30% of our take-home incomes.

This pot isn’t just for painting the town red, holidays, concert tickets or meals out though. It also counts for things like entertainment packages, kids’ toys, gym memberships and any sort of “upgrade” from necessities.

So, if you decide to drive to work in a sparkling new sports car rather than a second-hand car, the difference in cost is a “nice-to-have”. It’s the same principle if you like to throw some luxury brands into your weekly shopping trolley, instead of the economic alternatives.

Nice-to-haves also include our spur-of-the-moment splurges. Have you ever chucked a chocolate bar into your basket as you’re paying, or grabbed a till-side bargain? Us Brits love an impulse buy, and over a lifetime a survey suggests we’ll spend an average of £144,000 on our spontaneous shopping. Topping the list are chocolate, clothes, takeaways and coffee. All of these little luxuries come out of the 30% pot as well.

These 30% treats are important. They’re the nice things that make life worth living. And help keep us motivated.

20% for saving and investing

As a nation we’re not the best at saving. It’s estimated that 12.8 million households in the UK have less than £1,500 in savings, or nothing at all.

This doesn’t give those families a lot of leeway when it comes to emergency purchases, loss of income or if they’d like to save up for something big, like a mortgage deposit.

Saving little and often can help to create a great pot over time. It can also help to relieve stress and feel in control.

With Warren’s 50-30-20 budgeting rule, 20% of the household income is set aside for savings. This means, within just five months, you’d have an entire month’s household income saved up. A great start towards the three to six months of living costs experts suggest having as an easy to access emergency fund.

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Hannah Duncan is an investment writer, and founder of Hannah Duncan Investment Content, with years of experience producing content for global leaders in finance and retail.

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