50-30-20 Rule – Overview
Who doesn’t want to be financially independent? But it turns out that despite having a healthy income, we are all constantly in a financial crunch. Blame the steady rise of inflation, the cost of living, or other factors contributing to insufficient funds in our savings. Want a way out?
Start taking control of your finances; the key is not just finding ways to increase your income. Instead, it is all about budgeting right.
Whether you are a salaried professional, a businessman, or anyone looking to realign their financial future, budgeting is crucial to making wise financial decisions. This is where the 50/30/20 Rule comes into play. It is astonishingly simple and highly effective.
In this blog post, we will look at what the 50/30/20 Rule is and how you can use it for financial planning.
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Decoding the 50/30/20 Rule
In order to fully understand this rule, let’s examine a simple example. Let’s say you are earning Rs. 1,00,000 per month from your full-time job, freelancing gigs, projects, or other income sources.
Here’s a breakdown of how you should allocate your income using the 50/30/20 Rule.
Needs 50%
A majority of your income should be allocated to your needs. These include:
- Groceries & Food
- Rent or Repayment of your Home Loan (if applicable)
- Insurance
- Health
- Utilities (Electricity Bill, Gas, Internet, Mobile, etc.)
- Debt Repayments
- Taxes
- Childcare
- Family Expenses
Basically, all essential spending that you cannot do without. If you fail to pay for any of these, it can either mean you will be in trouble or make life difficult.
As per the Rule, 50% or up to Rs. 50,000 can be spent on needs in our example.
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Wants 30%
Next comes wants. These are things that you can live without but form an important part of your life. For example, if you answered Netflix, Gym Membership, Books, or Travel, these are things you “want” but can live without.
In other words, if you were to not spend on these things, your life would not come to a complete standstill.
Wants include:
- Traveling (especially leisure)
- Subscriptions (Netflix, Cable TV, Gym, High-speed Broadband, etc.)
- Shopping
- Entertainment
- Restaurant Meals
- Electronics
- Second Home
For all these, you can spend 30% or up to Rs. 30,000 as per our example.
So if you are planning to get a car, and the monthly EMI of your dream car is Rs. 35,000, you should avoid it. Instead, opt for an option that fits comfortably within this budget.
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Savings 20%
Last comes saving.
Keeping this bucket to just 20% ensures that your savings do not eat into your lifestyle and needs and is an amount that you are comfortable with.
Savings include:
- Emergency Fund allocation
- Stocks
- Mutual Fund investments or SIP
Setting aside funds for larger spending like real estate, child’s education, etc.
Debt repayment beyond the minimum payments
Assuming Rs. 1 lakh income, we allocated 50% to our needs and 30% to our wants; we are left with 20% for savings, up to Rs. 20,000.
This, 50/30/20, is how we should live our life so that it is comfortable and financially sound.
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Conclusion
Sounds easy, right? Financial experts highly recommend the 50/30/20 Rule, as it enables you to lead a meaningful life.
However, ensure you plan your life by correctly understanding your income.
In the end, mastering finances is not just about how much you earn but also how you spend what you earn. The 50/30/20 Rule offers not only a roadmap but a compass, pointing you toward a destination of financial freedom and fulfillment.
