50-30-20 budget rule explained
According to this rule, you must categorise your after-tax income into three broad categories: 50% for your needs, 30% for your wants and 20% for your savings. This way, you set aside a fixed amount from your income for each of the categories. This reduces your urge to withdraw amounts from one category for another.
50% for needs
Up to 50% of your income should be kept aside for your needs. Your needs refer to your essential expenses, financial obligations and other responsibilities. These can include rent, utilities, groceries, healthcare, insurance premium, child’s school or college fees and more.
30% for wants
The next 30% of your income can be used to fulfil your wants. You may want to live a certain lifestyle. You may want to dine out, watch a movie or play in a theatre, pursue a hobby, go on vacation, purchase luxury items like watches or bags, non-essential electronic items and more. Wants may not always be necessary, however, keeping aside 30% of your income for wants gives you the flexibility to enjoy as per your choice while still maintaining financial discipline.
20% for saving
The last 20% of your income should be allocated towards savings and investments. Savings offer you a cushion for any financial emergency, medical treatments, house or car maintenance and more. Savings also help you stay financially prepared to achieve your long-term goals, such as buying a house, your child’s higher education or wedding, a comfortable retirement and more. When you set aside a portion of your income every month, you make progress towards long-term financial security.
Savings also help you avoid falling into debt traps. They reduce financial stress and anxiety, allowing you to focus on the more important aspects of your life. You are better prepared to handle unexpected expenses, manage financial emergencies, and live more peacefully.
Life insurance plans like ULIPs, endowment plans and more help you save money for your financial goals.
How to use the 50/30/20 rule?
Using the 50/30/20 rule is easy. All you need to do is evaluate your financial needs, your lifestyle wants and your future goals. This is simple and does not require an advanced understanding of finance. Below are the steps you can follow:
Calculate your monthly income
It is important to know your monthly income post taxes. This is your take-home pay that you use on your needs, wants and savings. You may go through your bank statements to determine the exact amount of income you earn after tax.
Categorise your spending for the past month
To calculate your monthly income, you need to review your expenses. You can look at past bank statements for this. Make a list of your needs, wants and savings from the previous months. This will help you understand your spending patterns and plan accordingly.
Calculate a spending threshold for each category
Now that you know your monthly income and the percentage you need to allocate to each category, you can easily calculate the amount to allocate to each category every month. For example, if you earn ₹ 1 lakh, you can allocate ₹ 50,000 to your needs, ₹ 30,000 to your wants and ₹ 20,000 to your savings, every month.
Evaluate and adjust your spending to match the 50/30/20 rule
Compare your current allocation with the allocation calculated above. If you are spending more in one category, look for ways to cut back to align with the recommended percentages. For example, if you allocate ₹ 40,000 to your wants and only ₹ 10,000 to your savings, you may need to realign your budget.
Plan your budget around these numbers
The calculated allocation acts as a guide for your future budgeting. It is important to keep this in mind and allocate your income accordingly. Try to stay within the suggested percentages for each category every month. If you are unable to do so for one month, aim to make up for it in the next.
The 50/30/20 rule can help you be more diligent with your money. It promotes financial discipline for life while also helping you to enjoy life and plan for the future. The rule makes you better prepared financially and empowers you to take control of your money.