50%: Needs
Needs are the basic and mandatory expenses you need for survival. Thumb rules for investing dictate that needs should be covered first, followed by wants and savings. The 50/30/20 savings rule allocates half of your net income towards meeting these essential expenses. Some common examples of needs include:
- Food
- Rent
- Electricity
- Groceries
- Home loan EMIs
- Insurance premiums
30%: Wants
Wants are expenses that are not absolutely essential to your living. In other words, expenses on wants are optional or discretionary spends. Wants are essentially expenses you make to lead a certain lifestyle. For instance, dining out instead of cooking at home, buying an expensive car instead of a cost-effective alternative, shopping for luxury watches instead of local ones, etc. According to the 50/30/20 savings rule, you need to dedicate 30% of your income to non-essential wants. Some common examples of wants include:
- Sporting event tickets
- Dining out
- Travel
- Buying latest electronic gadgets
20%: Savings
The remaining 20% of your net income goes towards savings and investments. First, focus on creating an emergency fund that can sustain you for at least three months. Beyond that, you can allocate your savings to various life goals like buying a home, planning for your child’s education, and retirement planning. You should park your savings in investment avenues that best align with your life goals and risk appetite. Ideally, you should create a balanced portfolio with a healthy mix of money-market instruments like stocks and mutual funds and fixed-income plans like, NPS, and PPF. Common instances of savings and investment include:
- Contingency fund
- Investing in the stock market
- Booking a fixed deposit. You can consider investing in Bajaj Finance Fixed Deposit as they offer one of the highest interest up to 8.65% p.a.
- Investing in endowment plans and ULIPs
Benefits of the 50/30/20 budget rule
- Easy to use
When it comes to rules for saving money, the 50/30/20 budget rule is one of the easiest to implement. You can easily segregate your income into the three proposed categories using the rule’s simple savings ratio formula.
- Streamlined money management
Implementing this rule can help you budget your expenses, ensuring better money management. With the 50/30/20 rule, you can save for the future without compromising your current needs and wants.
- Focus on savings goals
Allocating 20% of your income to savings every month can help you achieve various savings goals. From creating a contingency fund to planning an early retirement, this budgeting and saving rule helps you achieve your goals in a systematic and disciplined way.
- Creating long-term financial security
Consistently saving with the 50/30/20 rule helps you build a substantial savings corpus in the long run. You can invest your saved funds in high-interest paying instruments like fixed deposits, shares, and mutual funds.
How to implement the 50/30/20 budget rule
Unlike the rule of 72 that involves complex calculations, the 50/20/30 rule is comparatively simple. You can implement this simple rule using the following tips:
- Track your expenses
Before implementing this savings rule, track and analyse your monthly expenses for a couple of months. Segregate your expenses into needs, wants, and savings categories to understand your spending patterns better.
- Understand your income
The 50/30/20 rule for saving money is applicable on your net income. In other words, your take-home pay post taxes. Carefully evaluate your monthly income to correctly allocate funds for each category - needs, wants, and savings.
- Identify your costs
Identify the non-negotiable expenses in your budget which cannot be avoided. These expenses can include rent, mortgage payments, utility bills, transportation, groceries, and insurance premiums. Doing so will help you chalk out the expenses where no compromises can be made.
- Automate your savings
Set up an auto-deduct standing instruction with your bank to divert a portion of your income directly into a separate savings account. Automating savings ensures steady contributions to your savings pool without any manual effort.
- Maintain consistency
Like all budgeting and savings rules, the 50/30/20 rule only works when you consistently follow your savings strategy, every month. Try to avoid impulsive expenses and going over-budget. Limit your spends to the suggested percentages in each category.
Also read: What is return on investment
Example of the 50/30/20 budget rule
Let us assume your total net income post taxes stand at Rs. 50,000. Now, applying the 50/30/20 rule, you must allocate 50% of your income or Rs. 25,000 to cover your needs. Next, 30% of your income or Rs. 15,000 can be channelled towards your wants to cover discretionary expenses like travelling, retail therapy, etc. The remaining 20% or Rs. 10,000 of your income should go towards your savings and investment plans to create a corpus for emergencies and achieve your life goals.
Conclusion
Apart from sticking to this fundamental savings formula ratio, you can also modify percentages according to your circumstances and needs. You can allocate funds on a 50/20/30 or 70/20/10 basis to better match your financial goals and needs. Remember that the most essential element of every budgeting rule remains limiting discretionary spending to maximise savings and accelerate wealth growth.
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