Manage your budget in COVID crisis — 50/20/30 Rule
A monthly budget is one of those financial necessities most people don’t want to think about, but definitely should. The idea of how to perfectly allocate the monthly salary is something most people find troublesome and confusing. The 50/20/30 rule is one of the most basic and effective principles with a fairly simple breakdown: 50% of your take-home monthly salary to necessities, 20% to financial goals, and 30% to lifestyle expenses.
The 50/20/30 rule was made popular by the US Senator Elizabeth Warren and her daughter Amelia Warren Tyagi in their book ‘All its Worth.’ Warren and her daughter called it the ‘balanced money formula,’ which, when followed, can do wonders for your monthly budget and your future financial goals.
How It Works
On payday, the very first thing to do is distribute the amount into three portions: 50%, 30% and 20% of the salary amount. You don’t need to transfer the amount into three accounts or make three funds, you just have to know how much you can spend from your monthly salary on your monthly expenses. It would be better if you write the actual amount of the respective divisions of your salary in an easily accessible place when you are paying for something like as a note on your desktop, or in Google Keep.
The 50%
The first 50% of your salary goes towards your basic necessities, such as paying for utilities, rent or mortgage payments, loan payments, medical expenditures etc. Some people include clothing and transportation in this category, while some consider them as lifestyle expenses. In the end, the way you categorize these expenses would depend on you and your salary amount. If you think your 50% is enough to include clothing and transportation in this category, you can, if not, move them to the 30% lifestyle category.
The 20%
The next 20% of your take-home salary goes towards savings, debt and investing. These can include paying down your credit card debt (which you wouldn’t have once you start paying by this rule), building an emergency fund (which would exclude big medical expenses from the 50% category), saving for retirement or for further investment. This 20%, even when unused, should never be included in the other two categories to achieve your future financial goals. it is crucial that you have enough amount as savings or investments. Given a choice, it is always advisable that you invest the saved amount.
The 30%
The remaining 30% is for Lifestyle or miscellaneous expenses like restaurant food, movie tickets or other entertainment expenses, gym fees, shopping (excluding utilities), clothing, and transportation (if you didn’t include them in the 50% category). The 30% category pertaining to lifestyle expenses has the biggest scope of saving. You can buy clothes only when you need them, go to watch movies when you desperately want to see and you can always take public transport once in a while to save transportation costs. Whatever you save here, you can add accordingly to the 50% or the 20% category.
While no budgeting strategy is one-size-fits-all, the 50/20/30 rule is an excellent yet basic rule for people who aren’t familiar with complicated budgeting strategies. Just by distributing your salary in three parts, you can know how much you can and should spend, based on the type of expense. And whatever you save from the 50% and 30%, you can add it to the 20% bracket and invest for your future. If you can’t follow a strict monthly budget, this rule should keep your finances healthy, or as the authors of ‘All its Worth’ explain, “The right place for most people most of the time, and it is a good place to aim for in your lifetime money plans.”
