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
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.
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.
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.
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.
When using the 50 30 20 rule what category are loan payments in? ›
When using the 50/30/20 rule to budget, which category are loan payments in? Mortgages, auto loans, and other installment loans go in the “needs” category. So do the minimum payments on your credit card because you have to pay at least that amount every month to avoid fees and negative marks on your credit report.
Is $1000 a month enough to live on after bills? ›
Bottom Line. 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 one negative thing about the 50 30 20 rule of budgeting? ›
Hopefully, you wouldn't do this, but the way the 50/30/20 budget is set up, it can cause high-income individuals to spend a lot of money on things that they don't need and not save enough for important financial goals.
How do you stick to a 50 30 20 budget? ›
Here's what a budget that adheres to the 50/30/20 rule looks like:
- Spend 50% of your money on needs. ...
- Spend 30% of your money on wants. ...
- Stash 20% of your money for savings. ...
- Calculate your after-tax income. ...
- Categorize your spending for the past month. ...
- Evaluate and adjust your spending to match the 50/30/20 rule.
Using them, you allocate your monthly after-tax income to the three categories: 50% to “needs,” 30% to “wants,” and 20% to saving for your financial goals. Your percentages may need to be adjusted based on your personal circ*mstances and goals.
Does the 50/30/20 rule include 401k? ›
Important reminder: The 50/30/20 budget rule only considers your take-home pay for the month, so anything automatically deducted from your paycheck — like your work health insurance premium or 401k retirement contribution — doesn't count in the equation.
Key Takeaways
The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
What are the alternatives to the 50 30 20 budget rule? ›
The 60/30/10 budgeting method says you should put 60% of your monthly income toward your needs, 30% towards your wants and 10% towards your savings. It's trending as an alternative to the longer-standing 50/30/20 method.
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.
How do you distribute your money when using the 50 20 30 rule? ›
The 50/30/20 rule is a budgeting technique that involves dividing your money into three primary categories based on your after-tax income (i.e., your take-home pay): 50% to needs, 30% to wants and 20% to savings and debt payments.
Is $4000 a good savings? ›
Ready to talk to an expert? Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
Which of the following expenses is a want according to the 50/30/20 rule? ›
Remember, a need is an essential expense that you can't live without, such as rent. A want is an additional luxury that you could live without, such as dining out. And savings are additional debt repayments, retirement contributions to your pension fund, or money that you're saving for a rainy day.
What is the 50 30 20 budgeting rule and how people could benefit from this? ›
Image: Female Real Estate agent offers insurance to young couple. The 50/30/20 rule budget is a simple way to budget that doesn't involve detailed budgeting categories. Instead, you spend 50% of your after-tax pay on needs, 30% on wants, and 20% on savings or paying off debt.
