Budgeting is one of the most important parts of money management as it helps to plan for your expenses effectively and build savings that can be invested for wealth creation. One such budgeting technique used by many is the 50/30/20 rule. It is a simple yet effective budgeting plan that offers a balanced approach to financial management, ensuring that the essential expenses are covered while still leaving income for spending and savings.
What is the 50/30/20 Rule?
The 50/30/20 rule, popularized by Senator Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan,” is a straightforward guideline for budgeting your income. It suggests dividing your after-tax income into three categories:
- 50% – Needs
- 30% – Wants
- 20% – Savings
Also read: Getting a Salary Hike? 5 things to do with the increased money
50% – NEEDS
About half of your budget is to cover your needs. This consists of the things you need to do and are necessary for survival. But if you are spending more than half of your income for your needs you need to make changes and alter them. Anything that you can’t live without is categorized in needs. Here are some things that can be classified as your need:
- Car maintenance or fuel.
- Groceries
- Insurance and health care
- Rents and house maintenance charges
- Utility bills
- Credit card bills and loans
30% – WANTS
These are those things that you like and want and these are not very essential. For example, you can cook and eat instead of ordering food or eating you, you can work out at home instead of going to the gym. This even includes things like buying something expensive like Audi instead of an economical Mahindra or even buying OTT subscriptions. Wants are the things that you do for yourself to enjoy and entertain yourself. Here are some things that are your wants and not needs:
- Latest model of any electronic item.
- Buying a gym membership.
- Unnecessary clothing accessories
- Tickets to watch a movie
Also read: How understanding the Rule of 8-4-3 can turn your Rs 30,000 monthly into Rs 1.5 cr?
20% – SAVINGS
We need to invest and save and 20% for savings and investment is great. It is necessary to have at least three months of emergency savings for any uncertain situation. Invest in various funds and make yourself a good financial future for your retirement or to make a big purchase like buying a house. Saving and investing include:
- Making emergency funds
- Investing in mutual funds
- Building funds to buy a property
- Repaying debt payments that are beyond minimum payment.
Also read: What is the 15x15x15 Rule In Mutual Funds for NRIs?
Step-by-Step Guide to Using the 50/30/20 Rule
Understanding and implementing the 50/30/20 rule requires some initial effort but can yield significant benefits in the long run. Here’s a step-by-step guide on how to use the 50/30/20 rule:
- Calculate Your After-Tax Income: Begin by determining your monthly take-home pay after taxes and other deductions. This is the amount you have available for budgeting purposes.
- Identify Your Essential Expenses: Make a list of your essential monthly expenses, including rent or mortgage, utilities, groceries, transportation, insurance premiums, and minimum debt payments. Total these expenses to calculate 50% of your after-tax income.
- Allocate 30% to Discretionary Spending: Next, allocate 30% of your income to discretionary spending categories like dining out, entertainment, shopping, and hobbies. Be mindful of your spending habits and prioritize expenses that bring you joy and fulfillment.
- Allocate 20% to Savings and Debt Repayment: Finally, allocate the remaining 20% of your income to savings and debt repayment. Build an emergency fund with three to six months’ worth of living expenses, save for long-term goals, and accelerate debt repayment.
- Monitor and Adjust: Regularly review your budget to ensure you’re staying within the prescribed percentages. Life circumstances may change, so be flexible and adjust your budget as needed to align with your financial goals.
Also read: ๐๐ฒ๐๐ ๐ ๐๐๐๐ฎ๐น ๐๐๐ป๐ฑ๐ for NRI in India 2024
Example of 50/30/20 Rule
50/30/20 is an easy strategy to make a budget. Where 50% of your income is for your needs, 30% of your income is for what you want and 20% is to invest and save. For example, Your income is โน60,000.
- 50%(Needs): โน30,000 for important expenses like rent, utilities, groceries, transportation, health care, and insurance.
- 30%(Wants): Keep โน18,000 for spending on non-essential items that you like and these things give you joy and enjoyment like dining out, entertainment, shopping, and hobbies.
- 20% ( Savings and investments): Give โน12,000 to savings for goals like emergency funds, retirement, or investments. And, allocate this portion to paying off debts like credit card balances or loans. Also to invest in mutual funds to create future wealth and secure financial future.
Benefits of 50/30/20 Rule
- Simple and Easy to Use: The rule’s straightforward breakdown of income into needs, wants, and savings/debt repayment provides clarity and ease of understanding for effective budgeting.
- Balanced Financial Priorities: By allocating specific percentages to essential needs, discretionary wants, and savings/debt repayment, the rule encourages a balanced approach to financial management, preventing overspending and promoting long-term stability.
- Financial Security and Preparedness: Prioritizing savings and debt repayment fosters financial security by building emergency funds and reducing debt burdens, ensuring resilience in the face of unexpected expenses or income disruptions.
- Flexibility and Adaptability: Despite its prescribed percentages, the rule allows for customization to individual circumstances and priorities, offering flexibility to adjust budgeting strategies over time to meet evolving financial goals and needs.
Also read: Want to Build Funds for Retirement in India as NRI/OCI? Read This
Wrapping Up
Using 50/30/20 prioritize your spending most efficiently so that you save for the future and manage your finances in the best way possible. This budgeting rule gives a clear idea and structure for budgeting, helping individuals maintain financial balance and make informed decisions about their spending and saving habits.
Looking to Invest your Savings in Indian Markets as NRI/OCI?
For Non-Resident Indians (NRIs) and Overseas Citizens of India (OCIs)who shifted to other countries for better opportunities, this salary hike presents an option to start utilizing the additional funds for investment in Indian markets.
NRIs/OCIs can now download the SBNRI App and choose to invest in different NRI mutual fund schemes in India with ease. You can also get detailed investment advice from experts at SBNRI. Also, visit our blog and YouTube channel for more details.
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FAQS
What is the rule of 50 30 20?
- The rule says that you should spend around:
- 50% of your after-tax income on needs.
- 30% on hoodies and other things that make you happy.
- 20% on savings and investments.
What is the pay yourself first strategy?
- You need to keep a portion of your paycheck into savings, retirement, and emergency funds and make a savings account before you do anything else.
Does the 50 30 20 rule work?
- Yes, it helps you to categorize and understand your finances and expenses in a much better way. This way you can balance your expenditure and build savings for future usage.
How to do a reverse budget?
- Reverse budgeting is also called paying yourself first. Reverse budget lets you first set aside money toward your saving and investing goals. Then spend what’s left on your expenses and optional spending.
Is the 50 30 20 rule a good idea?
- 50/30/20 rule can be a good budgeting idea if you want to bifurcate your earnings and plan your expenses. It can be good starter for you to manage your expenses and build savings for future.
What is a 50 30 20 budget example?
- 50/30/20 is an easy strategy to make a budget. Where 50% of your income is for your needs, 30% of your income is for what you want and 20% is to invest and save. For example, Your income is โน60,000.
- 50%(Needs): โน30,000 for important expenses like rent, utilities, groceries, transportation, health care, and insurance.
- 30%(Wants): Keep โน18,000 for spending on non-essential items that you like and these things give you joy and enjoyment like dining out, entertainment, shopping, and hobbies.
- 20% ( Savings and investments): Give โน12,000 to savings for goals like emergency funds, retirement, or investments. And, allocate this portion to paying off debts like credit card balances or loans. Also to invest in mutual funds to create future wealth and secure financial future.
Is 50 30 20 rule based on net income?
- The rule of 50 30 20 is based on the suggestion of dividing your after-tax income into three categories, needs, wants, and savings. It factors the net income remaining after paying tax dues.
