Budgeting Rule- 50/30/20

“The 50–20–30 budget rule is an intuitive and simple plan to help people reach their financial goals. The rule states that you should spend up to 50% of your after-tax income of needs and obligations that your must-have or must-do. The remaining half should be split up to 20% savings and 30% to everything else that you might want.”- Investopedia

I am very positive on the concept of forming a budget and then spending your income. This clearly gives you a direction of where the money is actually going. A lot of us get quite confused with how to start with the process of making a budget. Simple… Follow the 50/30/20 Rule!! It will work like magic!

The fundamental distribution of this rule is to allocate 50% of net income towards Necessities followed by 30% of income towards Wants and finally the remaining 20% to be kept as Savings.

One major reason of why this rule is considered to be a gift in disguise is because it happily allows individuals to spend a huge portion to fulfil their desires. Financial advisors may recommend you to invest 80% of your earnings on various instruments, but you know what… we all need recreation which needs money! So, you can’t practically invest such a huge share rather distribute them wisely and realistically.

• Start by calculating your Net Income After Tax.
• Once the amount is out, you are good to spend 50% of that amount on your Needs. But remember that you limit your needs up to the amount calculated.
• Then, you can plan your outings, dinners, trips with the other 30% of the amount. This is a very critical part because one can go slimy here. So, ensure you take care of your expenses properly in this area.
• What’s left with you is your Savings. This money can be invested in single or multiple products and can make you future ready. A lot of people clear their debts with this share. But according to me, clearing of debts is a necessity hence should be done way before.

It is to be noted that Indians have a higher ratio of savings than others. But due to change in lifestyle and rising inflation, situations seem to be changing.

It might sometimes happen that your needs exceed than before or you end up spending more unnecessarily. Don’t panic in such cases, but remember the gap areas and cover them up in the next round of income.

But in any case, try to maintain your savings amount on a regular basis because that is something that will safeguard you when in distress. Wants will always attract more spending, but that’s where you test your control skills and ensure you spend only a considerable share and not the entire income.