What is the 50:30:20 rule of budgeting?
Let us understand what this 50:30:20 rule is all about. It’s a wonderful yet simple method of budgeting your hard earned money. It helps you manage your money and helps you save money better.
The income that you earn (after deducting the tax) is divided into three categories:- 50% for needs/essentials , 30% for wants , and 20% for savings
That is in ratio 50:30:20
It’s a very simple rule . It’s tells you to divide your earning in three parts.
50% of the income goes for your needs.
Needs are absolute essential which you need for your survival.They are necessary for you to live. Buying your groceries, food, paying your electricity bills and other bills etc. comes in this category. Such things come in urgent list. If you don’t pay these bills now you will end up accumulating it for other month. So they need to be cleared the same month. Also very important to know that sometimes we confuse with needs and wants. Eg. Netflix , gym membership etc does not come in the category of needs. So, all your needs should be completed in 50% of your income ( income after tax).
30% of your income goes for your wants.
“ Wants” are the luxuries that money can buy. You don’t need them for your basic survival, but things you aspire for. These are also most difficult to navigate because wants are unending. It include things you buy for pleasure, for examples occasional dining, movie outings, travel, shopping, grooming, hobby classes, etc. As we can observe,the list of “ wants” never ends and if not taken seriously , it can also disturb the savings as well.
Always regulate on your wants. You should not go and waste money on useless things. Buy and spend money on things which gives you happiness but also it should be useful to you. Spend on your wants has to be limited to 30% of your income. Or else it can disturb your needs section.
20% of the income should be in savings and investment.
It is the fund that will help you in future. It is a kind of contingency fund or emergency fund. Savings are very important to keep you secure from any future need. Also you need to invest your money in a better way. You should have emergency funds to meet all your unplanned, unforeseen expenses. Although savings is extremely important, but also investing is equally important. Because the amount that you save today is not going to have same purchasing power at the time when you will need it in future. This happens because of inflation. So remember savings as well as investing both are equally important.
Where Does the 50:30:20 Rule Come From?
The 50:30:20 rule was popularized by Elizabeth Warren (a Harvard law professor)and her daughter, Amelia Warren Tyagi, in the book All Your Worth: The Ultimate Lifetime Money Plan. It was planned as a thumb rule for working-class families to plan and structure their spending in order to prepare for the future and unforeseen expenses.
How to Use the 50:30:20 Rule of Thumb for Budgeting
Most people save very less and unknowingly spend too much. 50:30:20 rule makes you aware of your financial habits and limit overspending. By spending less on the things that don’t matter that much to you, you can save more for the things that matters to you.