Most people are not aware about money budgeting and money management. The thumb rule of 50/30/20 will help them know about their financial goals and whether they have overspent or not. It is important to spend less on unimportant things to save more. This rule is a simple budgeting technique that can assist you in managing your money efficiently, easily, and sustainably.
As per the rule, a person should spend 50% of the total income after taxes on things that are necessary or which are compulsory to have. The remaining 50% can be distributed in two parts 20% for savings and debt payments and the remaining 30% in the way the person wishes. If you keep your expenses balanced across these major spending categories regularly, you may be able to put your money to work more efficiently. Furthermore, by tracking only three basic areas, you may save yourself the time and effort of going into the details every time you spend.
Did you know ? The 50/30/20 rule is an effective way to solve age old query and build more structure into your spending habits.
Also read: 10 Tips for Successful Money Management for A Profitable Business
What is the Origin of the 50/30/20 rule?
The 50/30/20 rule was established by current US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their 2005 book, All Your Worth. The Ultimate Lifetime Money Plan. Warren and Tyagi conclude from over 20 years of research that you don't need a complex budget to get your money in order. One must use the 50/30/20 rule to balance your money between your needs, wants, and savings goals.
What Is the Idea Behind the 50/30/20 Rule?
For several reasons, personal finance professionals recommend following the 50/30/20 guideline.
- This flexible budgeting technique allows you to spend money on things you desire while simultaneously saving for your goals.
- Working to keep your critical costs within 50% of your budget protects you from financial difficulties. Even if your present household income decreases by half, as if one member of the household loses their job, you'll be able to keep a roof over your head and weather the storm.
- The 50/30/20 rule, like other budgets, helps you manage your money and keep track of where it's going. It might help you determine whether you can afford to relocate to a more extensive property or buy that new designer bag.
- The main thing about sticking to a budget, even if you don't exactly follow the 50/30/20 rule, is that you have money rules to keep you on track.
Also read: Guide on How to Manage Money Effectively | Money Management Skills to Manage Your Finances
Rule Of Spending 50%: Requirements or Needs
Needs include things that must be purchased as well as survival essentials. Rent or mortgage payments, vehicle payments, food, insurance, health care, minimum debt payments, and utilities are all examples. Half of your after-tax income should fulfil your demands and liabilities. If you spend more than that on requirements, you will have to cut down on desires or alter your lifestyle, potentially by downsizing to a smaller residence or driving a less expensive car. Perhaps carpooling or taking public transportation to work is an option, as is cooking more frequently at home.
Rule Of Spending 30% of your income on desires
The rule of 50% of your after-tax income going toward your most basic requirements, the remaining 30% can be used to fund your wants. Wants are non-essential expenses—things you choose to spend your money on even though you could live without them if you had to. These could include:
- Going out to eat
- Shopping for clothes
- Gym memberships
- Groceries (other than the essentials)
- Luxury cars etc.
You can decide to cut the spending on wants if a more significant amount of money is being spent on these wants. It simply means being more mindful of your finances by identifying areas of your budget where you are unnecessarily overspending. A person can decide if it's a necessity or desire by asking whether they can survive without it. If yes, then it is likely a desire.
Rule Of 20% Income: Savings
Rule of 50% of your monthly income going to necessities and 30% to wants. The remaining 20% can be used to meet your savings goals or pay off any outstanding debts. Although minimal repayments are considered necessities, any additional repayments reduce your current debt and future interest, so they are considered savings. Setting aside 20% of your monthly earnings consistently can help establish a stronger, long-term savings strategy. This is true whether your ultimate goal is to save for an emergency, develop a long-term personal financial plan, or save for a house down payment.
How to Budget Using the 50/30/20 Rule of Thumb
Most individuals save too little and spend too much inadvertently. The 50/30/20 rule can help you become more conscious of your financial habits and avoid overspending. Spending less on things that don't matter as much to you allows you to save more for things that do.
For instance, if the monthly salary is ₹50,000 per month, 50% of ₹50,000, i.e. ₹25000, should be spent on expenditures, 30%, i.e. ₹15000 on desire and 20%, ie., ₹10000 should be spent on savings.
This is how it works:
Calculate your monthly revenue as follows:
Total the amount you receive in your bank account each month. Find out how much is deducted from your take-home pay if you have a company retirement plan, and add that amount.
Determine a budget limit for each category:
To determine how much you should spend in each category, multiply your take-home income by 0.50- for needs, 0.30- for wants, and 0.20- for financial objectives.
Plan your budget around the following figures:
List and total your monthly expenses by category, and determine if you're spending less than the monthly targets you established in the previous phase.
Stick to your budget:
Track your monthly expenses and make modifications as needed to stay within your spending limits in the future.
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Saving money is complex, and life frequently throws unexpected costs our way. Individuals that follow the 50-20-30 rule have a plan for controlling their post-tax income. Assume they realize they spend more than 20% of their earnings on want. In that instance, they may devise techniques to reduce those expenditures while diverting funds to more vital areas such as emergency reserves and retirement. Life is too short of denying yourself everything, but having a plan and sticking to it will help you pay your bills, save for retirement, and do the things that make you happy simultaneously.
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