The 50/30/20 rule of thumb is a way to allocate your budget according to three categories: needs, wants, and financial goals. According to the thumb rule, an individual should allocate 50% of the income to “needs” or essential expenses, 30% to “wants” or discretionary spending, and 20% towards financial goals or savings.
The essential expenses are those you would almost certainly have to pay, regardless of where you lived, where you worked, or what your future plans happen to include. In general, these expenses are nearly the same for everyone and include:
⦁ Housing
⦁ Food
⦁ Transportation costs
⦁ Utility bills
The second category, and the one that can make the most difference in your budget, is unnecessary expenses that enhance your lifestyle. Some financial experts consider this category completely discretionary, but in modern society, many of these so-called luxuries have taken on more of a mandatory status. It all depends on what you want out of life and what you’re willing to sacrifice. These personal lifestyle expenses include items such as your cell phone plan, cable bill, and trips to the coffee shop. If you travel extensively or work on the go, your cell phone plan is probably more of a necessity than a luxury. However, you have some wiggle room since you can decide upon the tier of the service you’re paying for. Other components of this category include gym memberships, weekend trips, and dining out with your friends.
The next step is to dedicate 20% of your take-home pay toward savings. This includes savings plans, retirement accounts, debt payments, and rainy-day funds. This category of expenses should only be paid after your essentials are already taken care of and before you even think about anything in the last category of personal spending.
The 50/30/20 rule (also referred to as the 50/20/30 rule) is one method of budgeting that can help you keep your spending in alignment with your savings goals. Budgets should be about more than just paying your bills on time, the right budget can help you determine how much you should be spending, and on what. The 50/30/20 rule can serve as a great tool to help you diversify your financial profile, reach dynamic savings goals, and foster overall financial health.
When you have a regular income, it’s important to have a planned way of expenditure too.
According to tax and investment experts, one can segregate one’s expenses into three categories expenses that can’t be stopped, expenses for savings, and expenses that are important but not necessary. On the basis of these three expenses, 50-30-20 rule of budgeting of one’s income comes into play where one devotes 20 percent of its income for savings, 50 percent for important and necessary expenses while 30 percent of the income is devoted to those expenses that is important but not necessary. Experts went on to add that if handled properly, this 50-30-20 rule of money helps an earning individual to meet one’s all types of investment goals with ease.
The expert said that important and necessary expenses include that kind of expenses that can’t be stopped means your home budget, child school, and tuition fee, loan EMIs, etc. These important and necessary expenses will fall in 50 percent of one’s income. Important but not necessary expenses are those that include weekend hangout, watching a movie with family, dine out with the family, etc. When you have a devoted amount for investment to meet your various goals, then it’s for sure that you are putting money in all kinds of options meant for meeting your short-term, mid-term to long-term investment goals. So, the 50-30-20 calculator is useful in meeting all kinds of investment goals. But, in the current scenario, when one is saving a good amount of money from one’s 30 percent income due to the lockdown and Covid-19 restrictions, it’s better to divert that fund into the 20 percent section.
From a financial perspective, it has taught us to have ample amounts in liquid form. If someone is able to save from the 30 percent section of one’s income, then it is advisable for him or her to create an emergency liquid corpus that can help him or her to survive for near one year even when he or she has no source of income. Once that liquid need is met, then one can decide as to which investment goal he or she would like to increase and decide on the basis of that requirement.”
Most people save too little and unknowingly spend too much. The 50/30/20 rule of thumb is a way to become aware of your financial habits and limit overspending and under-saving.
By spending less on the things that don’t matter that much to you, you can save more for the things that do.
Here’s how it works:
⦁ Calculate your monthly income: Add up how much you receive in your bank account each month. If you have a workplace retirement plan, find out how much is withheld and add that amount back in with your take-home pay. If you pay estimated taxes, reduce your monthly income amount accordingly.
⦁ Calculate a spending threshold for each category: Multiply your take-home pay by 0.50 (for needs), 0.30 (for wants), and 0.20 (for financial goals) to see how much you should ideally spend in each category.
⦁ Plan your budget around these numbers: Think of these three categories as “buckets” that you can fill with ⦁ monthly expenses. List and tally your monthly expenses under the category each falls into and see if you’re spending less than the monthly targets you established in the prior step.
⦁ Follow your budget: Track your expenses each month, and make changes where needed, in order to stick to your spending thresholds going forward.
The 50/30/20 rule of thumb isn’t the only game in town. Here are a few other budgeting techniques that might work better for you:
⦁ 70/20/10 Rule: This rule is similar to the 50/30/20 rule of thumb, but you instead parse out your budget as follows: 70% to living expenses, 20% to debt payments, and 10% to savings.
As with any rule of thumb, you’ll need to tweak it to fit your specific circumstance. When it comes to tithing or any other religious expense, individuals can decide for themselves whether that’s something they “want” or “need.”
The 50/30/20 rule doesn’t specify how much of each paycheck you should spend. The percentage of your paycheck that you spend or save largely depends on the 20% financial goal category. If your main financial goal is to reduce debt, you’ll be spending more of your paycheck on that. If your main financial goal is to save up an emergency fund, then you’ll be saving more of your paycheck.
Here are the key tenets of the 50/30/20 rule of budgeting:
⦁ This budget rule is a simple method that can help you reach your financial goals
⦁ This budgeting method stipulates that you spend no more than 50% of your after-tax income on needs
⦁ The remaining after-tax income should be split up between 30% wants or “lifestyle” purchases, and 20% to savings or debt repayment.
Saving is difficult, and life often throws unexpected expenses at us. By following the 50-20-30 rule, individuals have a plan with how they should manage their after-tax income. If they find that their expenditures on wants are more than 20%, they can find ways to reduce those expenses that will help direct funds to more important areas such as emergency money and retirement.
Life should be enjoyed, and it is not recommended to live like a Spartan, but 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.