10th Feb 2021 by George Fisk

The importance of a personal budget

budget notepad with coffee

One of the first questions I ask prospective clients is whether they have a budget. Whether you have enough income to cover your expenditure several times over, or you are drawing down on assets to fund your liabilities, the importance of a budget is high.


Here are a few reasons why:

Times have changed
The way the population funds their retirement expenditure has changed dramatically over the last two decades. The once ubiquitous defined benefit pension arrangement, which paid the retiree an income until death, is becoming more and more uncommon. This means the onus is now on the retiree to plan and invest their retirement assets rather than on the company where they formerly worked.

The need to invest
After a lifetime of contribution to the economy pensioners were rewarded by receiving a guaranteed income from their defined benefit scheme until death, which was usually linked to the Retail Price Index, a measure of inflation. As prices of goods and services rose each year, their retirement income would rise by a similar amount, meaning the purchasing power of the retirement income remained consistent. With defined contribution pensions becoming the norm, most pensioners will have a ‘pension pot’ that they can access at age 55 in the UK. It is now up to them, or their Wealth Manager, to sensibly manage this pot of money so it does not run out before death. Knowing how much you spend each month, along with what constitutes essential and luxury expenditure, is a great place to begin when planning for future expenditure needs.

Inflation risk
With interest rates as low as they are today, cash is no longer as ‘safe’ as it once was. This is because keeping your money in cash for an extended period will most likely lead to you ‘losing’ money in real terms as inflation erodes away its value, otherwise known as inflation risk.

In our opinion an ‘emergency’ pot should be kept in accessible cash in case of emergency. This can equate to as little as six months expenditure, if you have a regular income or as much as two years expenditure, if you do not have a regular income. Having this extra amount makes you comfortable.

Keeping track - 50/30/20
We believe a good place to start when devising a spending guide is the 50/30/20 rule. This rule specifies that you should spend approximately 50% of your income on needs, or essential expenditure. This includes things such as mortgage or rent, transport and food. This is followed by 30% on luxury spending, such as restaurant visits, shopping and holidays. Lastly, the final 20% should be saved, either by putting money into an investment account, pension fund or savings account. This 20% can also be used to pay of any debts over and above minimum payments due.

Required rate of return to achieve goals
Once you have a budget our planning work becomes far more relevant and useful. Accounting for your expected future expenditure, both regular items and one-off large items, allows us to plan accordingly, offering you peace of mind whilst enabling you to live a worry-free retirement.

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MASECO LLP (trading as MASECO Private Wealth and MASECO Institutional) is a limited liability partnership registered in England and Wales (Companies House No. OC337650) and has its registered office at Burleigh House, 357 Strand, London WC2R 0HS. The partners are Mr J E Matthews and Mr J R D Sellon; Mr D R B Dorman, Mr H Q A Findlater, Mr T Flonaes, Mr N B Tissot, Ms A L Solana. Telephone calls may be recorded for your protection.

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