What is the 50/30/20 Rule of Budgeting?
The 50/30/20 budgeting rule is a simple guideline for allocating funds among necessities, luxuries, and long-term goals. It’s not a strict law, but it may serve as a general rule of thumb when it comes to creating a budget.
It’s a budgeting strategy that emphasizes saving over spending. A good budget may help you figure out how much money you should be spending and on what kinds of things. If you’re looking to improve your financial health and stability, the 50/30/20 rule might be a useful tool.
We will examine the history of the rule, its operational details, its restrictions, and an example to help illustrate its use. Simply put, we’ll demonstrate why and how the 50/30/20 budgeting guideline works so that you may use it with confidence.
Origin of 50/30/20 Budget Rule:
The “50/20/30 budget rule” (sometimes written as “50-30-20”) is a financial strategy made famous by Senator Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan. Wherein, she writes, after taxes, your disposable income should be divided as follows: 50% on necessities, 30% on luxuries, and 20% in savings.
If you have no idea how much money you’ve spent or where it went, this is the rule for you. The main premise behind this guideline is to split your after-tax income in such a way that all of your necessities, wants, and savings are justified. Let’s check out what this guideline entails and how you may start using it immediately. In any case, continue reading!
What Does the Budgeting Rule of 50/30/20 say?
The Budgeting Rule of 50/30/20 is divided into 3 parts. As follows;
50% of your Income – Basic Needs
To start following this guideline, spend no more than half of your money on what is absolutely necessary. This number (50%) may seem excessive at first, but it makes a little more sense when you think about everything that fits under this category.
No matter where you reside, what you do for a living, or what your goals for the future are, there are some costs that you will virtually always have to cover—your fundamental expenses. These costs, which are almost always incurred, are practically universal.
Need-Based Expenditure includes:
- House Rent
- Grocery Bills
- Electricity, Water & Other amenities
- Mobile Recharge etc.
As you can see, these are all basic needs or essentials that one must have to spend on a day-to-day basis. No one can escape from these expenses. Hence, allocating 50% of your income to your needs will not only give you a sense of lenience but also motivation too when you are able to save money on the 50% spending limit.
30% of your Income – Wants
The second group consists of expenditures that improve your quality of life but ultimately add nothing to your budget. A number of economists classify everything in this section as optional. However, many items once considered luxury are now seen as necessities in today’s society. In the end, it’s up to you to decide what you want out of life and how much you’re willing to give up to get it.
Want Based Expenditure includes:
- Internet Subscription
- Movie & Shows
- Netflix, Prime Expenses
- Dining & Shopping
- Weekend Plans etc
You alone know which of your expenses are genuinely necessary and which might be classified as “personal.” This way no more than half of your money should be spent on necessities, and no more than one-third of your income should be spent on discretionary purchases. Having fewer of these expenses means more money going towards your Savings, Investing & Financial Planning.
20% of your Income – Savings
Having a savings account will help you weather financial storms caused by either the economy or personal circumstances. Spending your funds wisely should be your first priority. Don’t place them in investments with stringent lock-in periods and interest rates that can’t keep up with inflation. You should put your money into investments that can beat inflation and still provide you with quick access to your funds.
The savings bucket is what will get you through tough times in the future while necessities and wants ensure your comfort and well-being in the here and now.
It is recommended that you set aside 20% of your after-tax income for savings and investing purposes (as per the 50-30-20 guideline). Remember that money, unlike necessities and wants, should not be a tertiary concern. Nothing is more important than your money and savings.
The current era has made this money bucket the most crucial one. You can’t expect to stay in the workforce until you’re 60 like your parents did, and you also won’t remain youthful forever. Given the uncertainty of the times, people are increasingly pursuing nontraditional professions and switching occupations often. In spite of all that may go wrong, you should set up a nest egg for retirement and other contingencies.
Savings Based Investments include:
- Emergency Fund
- Public Provident Fund
- National Pension Scheme
- Post Office Savings
- Mutual Fund Investing etc.
Why is a 50/30/20 Budget Necessary?
The majority of individuals have a problem with saving money because they overspend. Using the 50/30/20 rule of thumb, you can keep track of your spending and savings and learn to live within your means. Cutting back on unnecessary expenditures frees up cash for investments in what really matters in life.
3 (Three) Important Tips to Begin Budgeting:
Know What you Earn
You must know exactly how much you earn in a month before you even consider spending. You must know what’s your take-home pay! As soon as you know your income, based on the tax structure, set aside the tax portion and move it aside. This money (tax) is not yours to spend. So, it shouldn’t come in your 50-30-20 budgeting.
Allocate you Expenses
Once you know how much you earn, start segregating your income into 3 brackets as the 50-30-20 rule and see where your expenses meet in regards to the rule. See whether there’s any overflow of expenses in any bracket as mentioned.
Yes, have a spreadsheet. You can also check money management applications that are available in the play store for free. Use these tools to assess your progress. With a spreadsheet, we must analyze our spending pattern. We must know where we are spending in excess of the 50-30-20 rule and look for alternatives.
The 50/30/20 budgeting strategy might be more effective if you first determine the reason you’re doing it. It’s similar to having your “eye on the prize.” The big picture might serve as a useful reminder to rein in spending when you’re feeling tempted. First, you need to ask yourself, “Why am I creating a budget?” For what purpose do I strive?
It’s tough to save because of the frequent occurrence of unplanned costs. The 50-20-30 rule provides a framework for deciding how to allocate after-tax earnings.
If they determine that more than 20% of their income is being spent on their desires, they may take steps to limit those outlays and put the extra money toward things like savings for emergencies and retirement.
If you’re trying to save money for a specific purpose, it might be helpful to put a precise figure on your savings goal so that you can check in on your progress every week, month, or year.
Disclaimer: All the information on this website is published in good faith and for general information purposes only.