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What is the 50-30-20 Rule?

Are you tired of having an empty bank account after two weeks or worse? Have you tried counting penny every time and failed miserably? If the answer to the above questions is yes, then 50-30-20 rule of budgeting can help you to manage your money and fulfill your financial goals.

The 50-30-20 rule was popularised by Elizabeth Warren in her book titled, ‘All your Worth: Ultimate Lifetime Money Plan’. It is a simple budgeting rule to allocate your post-tax income in three broad categories: Needs, Wants and Savings &Investments.

According to the 50-30-20 rule, 50% of your take-home salary can be earmarked for your needs, 30% for your wants and 20% towards savings and investment.

The needs, wants and saving requirements will vary from person to person. So, you will be the best person to judge what is a need or a want in your life. Also, fell free to tweak up this rule to make the best out of it. If you can save more than 20% of your income, go ahead and do it.

Are you ready to take control of your money? Just grab a pen and an paper to segregate your needs and wants.

Table of Contents

Needs

It can be hard to differentiate between essential and splurge items sometimes. Needs are subjective but the basic principle to differentiate remains the same.

Needs are the expenses that are essential and cannot be forgone. They are necessary for the SURVIVAL.

Once you allocate a budget, it becomes easier for you to prioritize the things that are of absolute importance to you.

Here is a list of needs to get you started:

  • Shelter (Example: Home Loans, Utility bills)
  • Protection (Example: Health Insurance, Prescription Drugs)
  • Food (Example: Groceries)
  • Basic Hygiene (Personal and Household)
  • Transportation (Example: Auto Loan, Gas )
  • Installments and Legal fees

Wants

Mere sustenance is not what you want to live for! After a hard day’s work, sometimes, you just want to sit back and enjoy the finer things in life.

You may want to dine in a fancy restaurant for getting a promotion or you may want to finally buy that latest and outrageously expensive phone you had an eye on!

And that’s fine. As long as you have your needs covered and have a certain amount of money set aside for your emergency fund, it is okay to splurge on yourself! Because, what is the point of working so hard if the outcome does not make you happy.

Wants are the things that may not be at the top of your sustenance list but it is something that you need for living a happy and content life. But remember to splurge in moderation.

Let me help you out on what can constitute as a want in various categories:

-Household (Example: Remodeling, Domestic help)

-Food (Example: Dining out)

-Personal (Example: Manicures, Gifts, Spas)

-Recreational (Example: Vacations, Club Memberships)

-Transportation (Example: Business Class Ticket over economy)

Savings

Inculcating the habit of saving a specific sum of money every month can go a long way. If you have been working for a while, this is the right time to start saving.

It does not have to be a huge chunk of your paycheck. A little goes a long way!

To start, you can allocate at least 20% of your income towards your savings and investment. To help you to start saving, you can aim for financial goals. It doesn’t have to all fancy and grown-up like buying a house, you can start saving to buy your dream phone. Saving is a better option than swiping your credit card or taking a loan.

In addition to your goals, it is also important to build an emergency fund which will act like a cushion and soften the blow of any unfortunate circumstance that may arise in the future.

You don’t have to look far to find an option to start saving. Your humble savings account can help you to start saving for your goals.

Read: How to Build an Emergency Fund in a Savings Account

This easy Budgeting Rule is enough to get you started towards a journey of managing your finances well!

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