Understanding the 50/30/20 Budget Rule! (The 50/30/20 Budget Plan Made Simple)
The 50/30/20 budget rule is a simple way to allocate your money and hence making use of it wisely, in order to achieve greater financial stability.
Research shows that a lot of people around the world do not set a budget for themselves. But for the long-term financial health, setting a budget is essential.
Elizabeth Warren (U.S. Senator) coined the 50/30/20 budget rule in her book “All Your Worth: The Ultimate Lifetime Money Plan.” You know, Time magazine has named her one of the 100 Most Influential People in the World.
The basic strategy of the 50/30/20 budget rule is to divide the income you receive as a pay cheque by spending money into the following three categories:
1. 50% on your Essential Needs
2. 30% on your Wants
3. 20% on your Savings & Debt
Before diving deep into knowing all the categories in detail, let’s first understand why the 50/30/20 budget rule is the necessary rule in terms of budgeting and money management.
Why one must apply the 50/30/20 Budget Rule?
Most people spent their money without reviewing or creating a budget plan. This is not a good way of spending or managing money. The good way is to know how much you are spending, why and where you are spending the money. This is where the 50/30/20 budget rule plays the best role in offering flexibility as well as security.
Let’s understand all of the three budget plan categories in detail.
1. Spending 50% on your Essential Needs:
Needs are all the mandatory expenses, in general, the things necessary for survival. According to the 50/30/20 budget rule, you should limit your needs to 50 per cent. The needs category include mortgage or rent payments, utilities, groceries, healthcare, car insurance, credit card payment, etc. All these needs are an absolute must pay.
2. Spending 30% on your Wants:
Wants are all the things that are not absolutely essential. These are the opposite of needs. The wants include all the basic necessities of life that you enjoy such as entertainment, travel, cable/internet/phone, shopping, dining out, personal care, etc. In general, the wants comprise of all those extra things that make life more enjoyable and entertaining.
3. Spending 20% on your Savings & Debt:
One must allocate a minimum of 20% of their income on building their Savings and paying down Debt. These include student loans, credit card debt, savings, retirement, etc. You can add money to an emergency fund in a bank savings account as part of your savings. These savings can be further invested in the Mutual Funds or in the Stock Market. Any extra payments that reduce the future interest owed, are part of your Savings as well.
Real-Life Example:
Let’s assume you have a monthly salary of ₹20,000. So, according to the 50/30/20 budget plan, if we divide the money into the above three categories using the math, then ₹10,000 will be the amount for your Needs (50%), ₹6,000 for your Wants (30%), and ₹4,000 for your Savings & Debt (20%). You can do your math division as per the amount of your salary income and create your budget plan.
Conclusion:
The percentages 50, 30 and 20 serves as a general guideline for budgeting the money. Although, these numbers can be adjusted depending on the kind of lifestyle you live.
Whatever per cent number or ratio you choose, remember that making a budget is useless unless you completely stick to it.
