Budgeting & The 50:30:20 Rule
A budget is a spending/revenue plan for a person, a group of people, a business, a government, or other entity based on income and costs. It’s an estimate of how much money you’ll make and spend over a given time period and this is frequently created and re-evaluated on a regular basis. Short-term budgets cover and track expenses of a short span of time like a week, month or a year whereas Long term Budgets cover expenses over a year and these may include long term investments and other business goals.
A simple budgeting approach that can assist one in successfully, easily, and sustainably managing their money and budgeting is the 50/30/20 rule . The basic idea of this is to divide your monthly after-tax income into three spending categories: 50% for needs, 30% for wants, and 20% for savings. The 50/30/20 rule is an excellent way to add discipline to the spending habits and achieve one’s financial objectives.
What does 50, 30 & 20 Stand for?
Needs are unavoidable expenses such as payments for all the basic necessities that one would find impossible to survive without. Your most essential expenses should be covered by 50% of your after-tax income. If your needs require more than that, you’ll have to either cut back on your wants or reduce your lifestyle to fit your budget.
You can spend up to 30% of your after-tax income on your wants. Wants can be defined as non-essential expenses or desires that you choose to spend your money on, although you could live without them if you had to. Wants are essentially all of the small extras that we spend money on to make life more pleasurable and engaging.
20% SAVINGS :
The remaining 20% can be used to achieve your savings objectives or to pay off any existing obligations. Putting aside 20% of your earnings on a monthly basis can help you build a stronger, more long-term savings strategy.
Identifying Needs and Wants
(I) Some examples of essential costs(50%) :
1) Living expenses like Rent or a mortgage
2) Monthly bills which will include A cell phone bill, credit card bill or electricity bills.
3)Food: Grocery purchases and meals are other examples.
4)Other essential costs based on individual needs like health care, car insurance etc.
II) 30% of your monthly budget goes to wants which can include :-
a] Hobbies like painting supplies, knitting yarn ,gym equipment/membership.
b] Dining out.
c] Clothing items.
d] Entertainments like movies and gaming come under entertainment costs.
e] Vacation costs like flights, hotels and entertainment.
(III) Identifying your financial goal is also important while budgeting.When are where to allocate the set 20% can be a question for many.Some examples of these can be :-
- mutual funds
- Clear debts and loans
- Emergency funds.
- High yield savings account.
How does the Rule Work?
STEP 1 : Calculate your monthly income.
Let’s Assume Person A receives Rs. 50,000/- every month in this bank account.
STEP 2: Categorize your spending.
Divide the total amount you have into 3 different categories to match the 50:30:20 rule.
TOTAL IN-HAND : 50,000 Rs.
NEEDS : 50,000 /100 x 50 = 25,000 Rs.
WANTS : 50,000/100 X 30 = 15,000Rs.
SAVINGS: 50,000/100 X 20 = 10,000Rs.
STEP 3 : It’s also crucial to keep track of your spending each month and make adjustments in the budget as needed.
Why Is Budgeting Important?
Life is meant to be enjoyed, but spending your money like water is also not a solution. Therefore having a plan and sticking to it will allow you to cover your expenses, save for retirement, all at the same time doing the activities that make you happy. The 50-20-30 rule of budgeting is intended to help individuals plan how they should manage their income more seriously and help you become aware of your financial habits, limit overspending and give a chance for saving up for retirement and emergencies.
Benifits of 50-30-20 Rule of Budgeting
- The 50-20-30 rule takes only a little prior arithmetic to keep track of your money. Other budgets demand you to track a variety of expenditure categories, but this one just requires you to consider three.
- The 50-20-30 rule can help you save 20% of your monthly income which can help in the long run.
- 20% of the savings can also be used on paying off debt or to start an emergency fund.
- Regardless of these particular characteristics, the 50-20-30 budget may help people arrange their finances, making it a versatile personal budgeting option.
- Since it is easy budgeting practice to follow, it can help people keep to their budgets and achieve their long-term financial objectives.