If you are an earning person, it’s pivotal for you to plan your finances in advance to gratify your daily needs and unforeseen emergencies ahead. That’s when budgeting comes into the picture. The simplest method to understand your finances is to categorise your total income post taxes into different sections based on your needs and wants.
Now you must be wondering what percent each section shares. The 50-30-20 budget rule solves your hitch in seconds. Before we go any further, let’s learn about this rule and how it works. The 50-30-20 budget rule says that you need to divide your total net income, i.e, after removing your taxes, into three categories such as needs, wants, and savings. The total allocation goes like this: 50% of the net income goes into needs, 30% into wants, and 20% into savings for future use.
Manage Your Home Budget With The 50-30-20 Budget Rule
This is one of the best budgeting strategy rules for money management. The process is very simple and effective, as it teaches you how to put your funds to proper use. So, let’s walk you through the division part of this rule in detail:
50% Needs: Out of your total income, allocate 50% for needs. These are daily expenses that you meet on a regular basis like groceries, shopping, child care, paying utility bills, health care, etc. All household-related expenses come under this category. If you see a surge in the needs category, then you have to scale down a bit on your wants to keep them balanced. But if that’s far-fetched from happening, then slump your expenses towards your lifestyle.
30% Wants: Allocate only 30% of your net income towards your wants. This category is not so essential for survival but to improve your current lifestyle. Since wants are innumerable, it won’t stop just after fulfilling one. The list of wants include travelling, watching movies outside, dining in restaurants, personal grooming, etc.
As per the rule, navigating your funds within the set limit can be difficult initially but it depends on how consciously and wisely you are spending your money. So, next time, before you buy any non-essential item, ask yourself this very question: “Do I really need this?” If the answer is “Yes”, then be sure of why you are buying it.
20% Savings: The last part of your net income, i.e, 20% goes into savings. This is an important section for every earning person as your whole life depends on these funds. While your needs and wants lay a foundation to lead a better life, savings is the engine that drives you to the future. Here, you have to be non-negotiable at any cost.
You are not only adding 20% every month consistently but also building an emergency fund for you and your family which can come in handy at the time of unprecedented situations. For instance, if you lost your employment, you should have three months of savings ready to keep yourself going. In case, you have a loan payment unpaid for the final month, you can pull out from your savings to free up your debt.
If you are planning for retirement, invest partly in tax-saving funds, 401k plans, IRAs, etc. Ergo, savings is one financial section of your net income that secures you from ups and downs. So, save wisely, save more. The better you save, the richer your life will be.
Benefits of 50-30-20 Budget Rule:
Helps you determine your savings: Once you figure out your wants and needs, the funds left at the end is your savings. The 50-30-20 budget rules helps you divide between these categories and gives you a clear picture of your income and expenditure.
Helps you plan things in advance: To save yourself from the unprecedented onus, it’s always important to plan in advance. The 50-30-20 budget rule puts you a step ahead in your financial planning. This rule tells you where and how much to invest, and keeps a track of your monthly cash flows.
Helps you work on your financial goals: Each person has different financial goals to achieve in their life. The 50-30-20 rule diverts your net income to work towards your financial goals. Though you have so many needs and wants to fulfil, this rule organises them in order based on your set priorities.
Prepares you for retirement: Start your retirement planning from the day you started earning. Don’t wait till you retire. Since savings being one of the categories in the 50-30-20 rule, set aside some corpus to plan for your retirement. Investing a portion in financial avenues like ULIPs, SGBs, NPS, etc.
Keeps your finances balanced: The 50-30-20 budget rule helps you understand how money works in the real world. It teaches you how to meet your requirements and still find financial balance at the end of the day. For instance, 30% is set aside only for wants. You can use it for shopping, travelling, dining outside, etc.