The 50/30/20 rule is a simple rule of thumb to make your finances in order. It’s also known as 50/30/20 rule of budgeting. It helps you manage your finances according to your needs, wants and financial goals. This rule states, by the rule of thumb only, that 50% of your income should go to your basic needs, 30% of your income should be directed towards overhead expenses or discretionary expenses and the rest 20% of your income should go towards savings that ultimately contributes to your financial goals. And this is applicable to after tax income to be precise.
Directly half of your income is generally used up in serving your basic needs which are the essential spending. These are the expenses that cannot be avoided at all cost and are necessary for one’s survival. The rent of the property you are living in, groceries, mortgage payments or insurance and similar necessary expenses could be included in this category. If your needs are costing you more than 50% of your income, it could hamper your financial goals for long term.
These are the desires that you want to fulfill and that are not really very essential. Dining out, going for a movie, ticket to sport event, going on a vacation, purchasing an expensive watch and so on. Wants make a bucket of 30% of the total after tax income. However, this really depends on person to person. So, this could be an optional bucket form this rule. But this helps you make your life more enjoyable.
Savings is the pathway towards your financial freedom. This is the most difficult task to accomplish, so the first task as soon as you get your salary is to separate the 20% for your savings and investments. Otherwise, you will always be short of funds to do any kind of savings. Moving on, you could allocate this amount to emergency funds, retirement funds, making an SIP in mutual funds or buying stocks of the companies that have a good future prospect. In case of the use of emergency funds, don’t forget to fill that up again for future uncertainties.
Your front-end expenses could be easily met with your income and don’t need much of a planning. So, this rule ensures you have a good future prospects too and you don’t suffer in case you lose your job or happening of any unpredictable event. People are living longer years and thus, your financial planning will not only help you enjoy and live your adulthood days fully, but also your retirement days (without having to think much about the finances).
If this blog let you think about your finances, do tell me in the comments.
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