Savings can be a tricky subject to many, we plan to build wealth through savings, but it is not an easy task. We either save so much that there is a cash crush or end up spending everything. But there is a middle ground to a situation where you can save while you spend. This is rule is commonly known as the 50 30 20 budget rule. Let us learn in this piece how to budget your money with a 50-30-20 rule.
Once you receive your monthly income after deducting the required variables (the variables here are PF, taxes, HRA, so on.) make a habit of keeping 50% of it aside. You can use this amount for the essentials necessary in your day to day life. The essentials can include house rent or EMI, food, transportation expenditure, medical needs, various insurances, etc.
The list of essentials makes sense why allocating half of your income in ‘needs’ is crucial. If you believe that you can spend lesser than 50% on needs, you are free to do so. On the contrary, if you are unable to manage your needs within 50% of your monthly income, it is best that you alter your lifestyle. You can make a few alterations and optimize your lifestyle. For instance, if you are living in a fancy house that burns your cash majorly you can try to shift to an affordable house. Also, if you are living far away from the workplace which adds an unwanted amount to transportation costs you can also move to a place closer to your place.
This is the crucial part where you can apply changes in a 50 20 30 budget rule. Personal budgeting is all about spending and savings. The scope to adjust your expenditure in wants is more as compared to needs. According to the rule, you should dedicate 30% of your income to the wants. Once you spend on essentials you can spend 30% on the things that you want. The expenditures in wants include shopping, outings, entertainment, eating out, etc.
You can also include other things like buying fun tech gadgets, gym membership, buying the subscription of OTT apps, family trips, etc. But it is necessary that you keep expenses within 30%.
Fundamentally this should be the first step where you should keep aside 20% as soon as you get monthly income. Or once you pay for all the essentials, you need to allocate 20% of your monthly income on savings. In this allocation, you can spend on debt like a student loan, credit card debt, etc. You can invest the rest in building more wealth. It’s very important that you stick to the rule and allocate 20% of your income in this category.
Now that you know the 50 20 30 budget rule works let us understand its importance.
The main objective here is to generate a corpus which you can use in emergencies or post-retirement. The recent COVID-19 crisis has made us realize how we should be prepared for uncalled emergencies like job loss, medical emergency, etc. In such scenarios, we should be in a capacity to help ourselves rather than opting for debt funds. The other reason is that the more you save more you can live care-free post-retirement. To ensure comfortable retirement it is necessary that you save funds and the 50-30-20 rule is just beginning to achieve that goal.
To make the 50-30-20 rule a habit it is necessary you make the calculations basis your income and follow the same every month. Let us discuss how to use a 50-30-20 budget rule.
It is crucial that you identify your spending habits and try to optimize your lifestyle accordingly. The more you save the better. You can analyze the bank statements of your previous months. You can use the statements to identify gaps between expenses and learn how to save more. You will identify between essential and non-essential spending. You can roughly calculate the amount you spend on essentials and identify expenses of wants. For example, if you earn 1,50,000 INR (in-hand salary) you can allocate 50% of it i.e. 75,000 INR to basic needs like house rent or EMI, utility bills, groceries, so on.
Considering the example mentioned in the above section person earning 1,50,000 INR can allocate 30% i.e. 45,000 of the income for the ‘wants’ category. As mentioned earlier this category includes expenses on which your life isn’t necessarily dependent. If you analyze your statements and find that you are spending more on ‘wants’ than ‘needs’, you should stop doing that. On the same hand, it is not necessary that you take all the ‘wants’ out of the picture. The main objective of the 50 30 20 budget rule is to save while you spend. So, the allocations should be in a way which will save your money and let you enjoy your life at the same time.
Basis your average you can decide how much you can save every month. The aim is to develop a habit that will help you save money. Even though the rule says it is necessary that you save at least 20% of your salary. However, you can change this number according to your preference. The objective is to save something every month. In some instances, will save 20% sometimes you won’t be able to save 20% but that’s okay. Before you start saving it will be helpful if you set your financial goals. Do you need to ask yourself Why am I saving every month? You need to define your financial goals. It can be anything and everything like wedding budget, retirement planning, kid’s education, etc. Once you set your goals it becomes easier to save every month. Also, with savings, it is never too late to start. You can start from any point in your life.
A 50-30-20 budget rule can be a good start to develop saving into a habit. The ideal rule is 50-30-20 but you can always alter it according to your preference. The only point to keep in mind is that you should ensure that 20% of your salary goes into savings. This rule will ensure due diligence in managing personal finances. You will become more mindful about your spending which will help in the long run.
The other popular saving strategies are mentioned below
1. The 10% rule - In this rule, it is necessary that you save at least 10% of your monthly income. This is the best-suited strategy for people who are struggling with the concept of saving. The fundamental logic of this rule is that pay for yourself first by saving 10% for your own future.
2. 100 minus your age – Subtract your age from 100 and the number you get is the part of your income (in percentage) you should save. Suppose your age is 25 then 100-25=75 i.e. you should save 75% of your income. The rule works on the fact that your expenses surge as you grow older. Hence the strategy to save more when you are younger.
As the old saying penny saved is a penny earned, hence to sum up saving may seem struggle initially but once you make it a habit you can do it efficiently.