If you are an income earner, it is essential for you to plan your finances in advance to meet your daily needs and unexpected emergencies in the future. This is where budgeting comes into play. The easiest way to understand your finances is to categorize your total after-tax income into different sections based on your needs and wants.
Now you must be wondering what percentage each section shares. The 50-30-20 budget rule solves your problem in seconds. Before going any further, let’s discover this rule and how it works. The 50-30-20 budgeting rule states that you should divide your total net income, that is, after taking out your taxes, into three categories such as needs, wants, and savings. The total allocation is as follows: 50% of net income is spent on needs, 30% on wants, and 20% on savings for future use.
Manage your home budget with the 50-30-20 budget rule
This is one of the best budget strategy rules for money management. The process is very easy and effective as it teaches you how to use your funds wisely. So, let us explain the division part of this rule in detail:
50% Needs: Of your total income, allocate 50% to needs. These are day-to-day expenses that you encounter regularly such as groceries, groceries, child care, utility bill payments, health care, etc. All household expenses fall into this category. If you see an increase in the needs category, then you need to reduce your wants a bit to keep them balanced. But if it’s overkill, reduce your spending to your lifestyle.
30% want: Allocate only 30% of your net income to your wants. This category is not so essential for survival but for improving your current lifestyle. Since the desires are innumerable, it won’t stop just after satisfying one. The list of wants includes travel, watching movies outside, dining out, personal grooming, and more.
As a rule, navigating your funds within the set limit can be tricky at first, but it depends on how consciously and wisely you spend your money. So next time, before buying a non-essential item, ask yourself this question: “Do I really need this?” » If the answer is “Yes”, then make sure you know why you are buying it.
20% savings: The last part of your net income, 20%, is devoted to savings. This is an important section for anyone earning income because your whole life depends on these funds. While your needs and wants provide the foundation for a better life, saving is the engine that propels you into the future. Here, you have to be non-negotiable at all costs.
Not only do you regularly add 20% each month, but you also build an emergency fund for you and your family, which can come in handy during unprecedented situations. For example, if you lose your job, you should have three months of savings to keep you going. In case you have an outstanding loan payment for the last month, you can withdraw from your savings to release your debt.
If you are planning for retirement, invest in part in tax savings funds, 401k plans, IRAs, etc. Ergo, savings is a financial part of your net income that protects you from ups and downs. So save wisely, save more. The more you save, the richer your life will be.
Benefits of the 50-30-20 budget rule:
Helps you determine your savings: Once you have determined your wants and needs, the funds left over at the end are your savings. The 50-30-20 budget rules help you break down between these categories and give you a clear picture of your income and expenses.
Helps you plan things ahead: To save yourself an unprecedented burden, it is always important to plan ahead. The 50-30-20 budget rule gives you a head start in your financial planning. This rule tells you where and how much to invest and keeps track of your monthly cash flow.
Helps you work on your financial goals: Each person has different financial goals to achieve in their life. The 50-30-20 rule diverts your net income to achieve your financial goals. Although you have so many needs and want to satisfy, this rule arranges them in order according to your priorities.
Preparing you for retirement: Start your retirement planning from the day you started earning money. Don’t wait to retire. Savings being one of the categories of the 50-30-20 rule, set aside some corpus to plan for your retirement. Invest a portion in financial avenues like ULIPs, SGBs, NPS, etc.
Keeps your finances in balance: The 50-30-20 budget rule helps you understand how money works in the real world. It teaches you how to meet your demands while ultimately finding financial balance. For example, 30% is set aside only for needs. You can use it for shopping, traveling, eating out, etc.