50/30/20 Rule

Understand how 50/30/20 rule can help you plan your budget better.
50/30/20 Rule
3 min
25-April-2024

Proper budgeting can pave the way for a secured financial future. Budgeting involves creating a detailed financial plan outlining how every rupee from your income is to be used. It is a detailed ledger of your income, expenses, and savings. While budgeting may sound easy, most of us find it difficult to budget finances and save for the future. Among the different types of budgeting rules, the 50/30/20 savings rule stands out as a popular and easy-to-implement option. According to the 50/30/20 rule, you need to allocate your in-hand income (post taxes) into three categories - needs, wants, and savings. This savings rule helps you better manage your finances and determine how much to spend and save.

Also Read: PF Withdrawal Rules

Key takeaways

The 50/30/20 rule fosters financial discipline by helping you budget your expenses using the following savings ratio formula:

  • 50% of your net income goes towards meeting your needs
  • 30% of your net income goes towards meeting your wants
  • 20% of your net income goes towards your savings

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 8.85% 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:

  1. 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.
  2. 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.
  3. 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.
  4. 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.
  5. 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.

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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