The 50/30/20 rule is a common practice used for budgeting that can help you allocate your income in a planned way. The rule simplifies the process of saving and spending by categorising your budget into three main categories: needs, wants and savings. This can help you achieve financial security for your future needs while managing your current expenses effectively.
50-30-20 budget rule explained
According to this rule, you must categorise your after-tax income into three broad categories: 50% for your needs, 30% for your wants and 20% for your savings. This way, you set aside a fixed amount from your income for each of the categories. This reduces your urge to withdraw amounts from one category for another.
50% for needs
Up to 50% of your income should be kept aside for your needs. Your needs refer to your essential expenses, financial obligations and other responsibilities. These can include rent, utilities, groceries, healthcare, insurance premium, child’s school or college fees and more.
30% for wants
The next 30% of your income can be used to fulfil your wants. You may want to live a certain lifestyle. You may want to dine out, watch a movie or play in a theatre, pursue a hobby, go on vacation, purchase luxury items like watches or bags, non-essential electronic items and more. Wants may not always be necessary, however, keeping aside 30% of your income for wants gives you the flexibility to enjoy as per your choice while still maintaining financial discipline.
20% for saving
The last 20% of your income should be allocated towards savings and investments. Savings offer you a cushion for any financial emergency, medical treatments, house or car maintenance and more. Savings also help you stay financially prepared to achieve your long-term goals, such as buying a house, your child’s higher education or wedding, a comfortable retirement and more. When you set aside a portion of your income every month, you make progress towards long-term financial security.
Savings also help you avoid falling into debt traps. They reduce financial stress and anxiety, allowing you to focus on the more important aspects of your life. You are better prepared to handle unexpected expenses, manage financial emergencies, and live more peacefully.
Life insurance plans like ULIPs, endowment plans and more help you save money for your financial goals.
How to use the 50/30/20 rule?
Using the 50/30/20 rule is easy. All you need to do is evaluate your financial needs, your lifestyle wants and your future goals. This is simple and does not require an advanced understanding of finance. Below are the steps you can follow:
Calculate your monthly income
It is important to know your monthly income post taxes. This is your take-home pay that you use on your needs, wants and savings. You may go through your bank statements to determine the exact amount of income you earn after tax.
Categorise your spending for the past month
To calculate your monthly income, you need to review your expenses. You can look at past bank statements for this. Make a list of your needs, wants and savings from the previous months. This will help you understand your spending patterns and plan accordingly.
Calculate a spending threshold for each category
Now that you know your monthly income and the percentage you need to allocate to each category, you can easily calculate the amount to allocate to each category every month. For example, if you earn ₹ 1 lakh, you can allocate ₹ 50,000 to your needs, ₹ 30,000 to your wants and ₹ 20,000 to your savings, every month.
Evaluate and adjust your spending to match the 50/30/20 rule
Compare your current allocation with the allocation calculated above. If you are spending more in one category, look for ways to cut back to align with the recommended percentages. For example, if you allocate ₹ 40,000 to your wants and only ₹ 10,000 to your savings, you may need to realign your budget.
Plan your budget around these numbers
The calculated allocation acts as a guide for your future budgeting. It is important to keep this in mind and allocate your income accordingly. Try to stay within the suggested percentages for each category every month. If you are unable to do so for one month, aim to make up for it in the next.
Conclusion
The 50/30/20 rule can help you be more diligent with your money. It promotes financial discipline for life while also helping you to enjoy life and plan for the future. The rule makes you better prepared financially and empowers you to take control of your money.
COMP/DOC/May/2023/265/3135
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FAQs
According to this rule, you must categorise your after-tax income into three broad categories: 50% for your needs, 30% for your wants and 20% for your savings. This way, you set aside a fixed amount from your income for each of the categories.
What is your guide to the 50 30 20 budgeting rule? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How do you calculate the 50 30 20 budget? ›
The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Learn more about the 50/30/20 budget rule and if it's right for you.
What is the 50/30/20 rule and give me an example using $2500? ›
$2,500: 50% of your income, is allocated towards necessities — rent, utilities and groceries. $1,500: 30% of your income, is allocated towards things you want, whether it's the latest iPhone or a fresh outfit. $1,000: 20% of your income, is set aside for saving or for paying off debts.
What are the expense categories according to the 50 30 20 budget rule? ›
Enter Your Monthly Income
50% of your net income should go towards living expenses and essentials (Needs), 20% of your net income should go towards debt reduction and savings (Debt Reduction and Savings), and 30% of your net income should go towards discretionary spending (Wants).
What is the 50 30 20 rule of budgeting examples? ›
For example, if you earn ₹ 1 lakh, you can allocate ₹ 50,000 to your needs, ₹ 30,000 to your wants and ₹ 20,000 to your savings, every month.
Can you live off $1000 a month after bills? ›
Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.
What is the first to look at when starting the 50 20 30 budget? ›
Before you can slice up your 50/30/20 budget, you need to calculate your monthly take-home income. This figure is your income after taxes have been deducted. It's likely you'll have additional payroll deductions for things like health insurance, 401(k) contributions or other automatic payments taken from your salary.
What is the 50 30 20 rule for 10000? ›
Now, as per the rule, the person will be spending 50% on the needs which is equivalent to 10,000 rupees. The person will spend 30% on 'wants' which will be 6,000 rupees. Now, the remaining amount will be saved, that is 4,000 rupees. As a fresher, this saved amount will equate to 48,000 rupees annually.
What are the benefits of the 50 30 20 rule? ›
The 50-30-20 rule is intended to help individuals manage their after-tax income, primarily to have funds on hand for emergencies and savings for retirement. Every household should prioritize creating an emergency fund in case of job losses, unexpected medical expenses, or any other unforeseen monetary cost.
Some Experts Say the 50/30/20 Is Not a Good Rule at All. “This budget is restrictive and does not take into consideration your values, lifestyle and money goals. For example, 50% for needs is not enough for those in high-cost-of-living areas.
Does a 401k count as savings for budgeting? ›
A 401(k) can count as savings in a 50/30/20 budget plan. But if 401(k) contributions are automatically deducted from your paycheck, they're not included in your take-home pay calculation.
Is the 50/30/20 rule gross or net? ›
50/30/20 explained. The basic idea of the 50/30/20 rule is simple. You allocate 50% of your post-tax income to “needs” and another 30% to “wants.” That leaves you with at least 20% of your net income that you're able to save or use to pay down existing debt.
When using the 50/30/20 rule to budget, what category are loan payments in? ›
Expert-Verified Answer. Final answer: Loan payments are categorized as Needs in the 50-30-20 budgeting rule because they are essential payments that must be made to maintain financial health and avoid negative consequences.
What is the 50 30 20 budgeting rule and how people could benefit from this? ›
You allocate 50% of your post-tax income to “needs” and another 30% to “wants.” That leaves you with at least 20% of your net income that you're able to save or use to pay down existing debt.
How to start following the 50 30 20 rule to eliminate budgeting stress? ›
The 50/30/20 rule can make budgeting easier. The rule allocates 50% of your take-home pay to needs, 30% to wants, and 20% to savings. Debt payments are technically in the savings bucket. You'll need to decide how to split that 20% between debt payments above the minimums and cash savings.
