What is 50/30/20 Rule of Money

Earning and saving both are equally important. Saving is needed to secure future or to meet the future obligations such as after retirement life, education cost of children, and marriage cost of daughter if any, to own a house, treatment cost of self and family members, to finance the son for his business or any other occupation. So, from the rising of sun i.e. early days of employment you should concentrate on savings and proper management of the savings to beat the inflation rate. Now the question arises how much you should or can save. Here we will discuss how much you should save to secure the future without any financial woes. Here we suggest you a rule of 50-30-20 strategy i.e. 50/30/20 rule of money.

What is 50/30/20 Rule,

Senator Elizabeth Warren coined the term 50/30/20 rule in her book “All Your Worth: The Ultimate Lifetime Money Plan.” This calculation is very simple and very easy to apply. You should divide your post-tax income into three parts and allocate every part for every sector. Your income will be divided as 50% on needs, 30% on wants and the rest 20% for saving. Let’s elaborate each component in 50/30/20 rule,

Needs i. e. 50%

Needs are such expenditures that are needed to meet the basic requirements for survival such as grocery food, cloth, home rent, utility bills, premium of health insurance as well as term insurance, medical expenses, transportation cost etc. These are the basic amenities for survival. You can allocate your 50% of income to fulfill these demands. But you should not include the dining out in weekend, Netflix Subscription costs as the needs.

If your earning is low, you can increase this percentage but anyhow you have to manage at least 20% savings. If from 50% earnings your needs are not fulfilled then you should compromise with the wishes and lifestyle. You should compromise with some matters.try to maintain a simple lifestyle to keep you basic expenditure within you 50% of income. It is also advised to lead a lifestyle that can be maintained after the age of 60 i.e. retirement life.

50/30/20 rule

Wants i.e. 30 %

Wants are those things that are no extremely necessary like food items. They are shopping like buying new and trending clothes or hand bags, travelling or making tours to different places, dinner and movies out, tickets to sporting events, vacations, the latest electronics gadget and ultra-high-speed Internet etc. This portion also comprises the rich like mentality or decisions you choose.

For example you decide to go to a five star hotel instead of a general restaurant, buying something from a mall or an expensive shop, buying an expensive four wheeler instead of a moderate one, moving always with a personal vehicle instead of public transport. You do all these things to simply show off or for comfort and entertainment. Now whatever you do you should limit these kinds of expenses within the 30% of your income. Your allocation of 30% should not cross and you should allocate 30% of your income in this sector.

Savings i.e. 20 %

The third and the most important component of 50/30/20 is savings. This portion should be spent as to secure your future or saving. The 20% amount of your income should be saved. With this saving you can pay off your debt if any. Otherwise, you should invest this 20% to meet the future requirements such as Retirement corpus, education cost of children etc. You need to invest the savings in various asset class i.e. equity, debt, gold, Government bonds which will beat the inflation and give you steady returns in the near future.

Let’s make it clear with the following example.

Suppose your monthly income is Rs. 1 Lakh.

50/30/20 rule

Finally,

You should consider some vital aspects. Your expenditure will increase as you grow older. This is a common rule of human life. Again with the increase in age you and your wife will be more vulnerable to various physical ailments. The socio-economic situation is also changing day by day leading to increase in monthly expenditures of people.

For example, in the beginning of the millennium, cell phones particularly the smart phones were not popular. Now, it is an essential product and a must have item. Naturally, this cell phone is an addition to the monthly expenditure. Once there ware black & white TVs, now there is expensive LCD or LED or Smart TVs which are definitely increasing the living cost. Now you must own a two wheeler that your father perhaps did not own. There are many such things which are adding our monthly expenditures day by day. So, try to manage things according to your income. If you want you can read our article How to get rich by small sacrifices.

Hope this will help you to prepare an ideal budget. If you have any question regarding 50/30/20 rule feel free to comment so that we have a discussion. If you have found this post helpful share this post with your loved ones.

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