Personal Finance Jun 21, 2021 03:38 PM EDT

Budgeting With the 50/20/30 Budget Rule

By Staff Reporter

Budgeting With the 50/20/30 Budget Rule
Budgeting With the 50/20/30 Budget Rule (Pixabay)

What is a budget? For many, it is just like a schedule to pay bills, but, in reality a budget is a lot more than that. A budget is a plan to estimate the amount spend on the different heads of expenditures and meeting them. Though the meaning of the word "budget" has not changed, but with time newer ways and strategies of budgeting have evolved. These budgeting strategies help to chalk out a plan and follow them to meet the budgetary needs.

One such popular strategy is the 50/20/30  budget rule. This rule effectively simplifies budgeting for all and helps to keep a track on expenditures and meet long term financial goals. This rule offers a financial solution to those who often find themselves unable to meet their budgetary goals. With the three simple categories, this rule successfully summarizes the complexities associated with the budgeting. The 50/20/30 rule is indeed rescue those who dread budget planning.

Read on to know more about the 50/20/30 rule.

The meaning of the 50/20/30 budget rule: The 50/20/30 rule means that one has to segregate their expenditure in a proportion which is optimal. It states that the after-tax income should be divided into three sections, which are needs, savings and wants. The percentages allocated for each of these sections   are 50% for needs, 20% as savings and 30% for wants. This allocation will help one to meet their basic needs, then save a portion for the future or rainy days and then the remaining portion can be utilized for wants and luxuries. This division of the income will help one to lead a much balanced life along with a future security.

Highest chunk for needs: This rule segments 50% of the income for needs. This category is specifically segmented to include those items that are essential and are the basic necessities of life. These are essential components and includes the basics like rent or mortgage payment, groceries, health care, insurance, and utility bills amongst a few more. These are  absolute necessities and indispensable for one's living. It does not include any luxuries which may be include but are not mandatory. This rule states that irrespective of the amount that one earns, half of their income should be reserved to meet the basic needs.

The next in line is savings: Once the needs have been met, the next category to focus on is savings. The rule states that 20% of the income must be saved for the future. Just like needs which are the requirements for the present time, savings are funds created to meet requirements in the future. It will help to meet emergency needs and act as contingency funds. One can choose to invest this savings in different investment instruments such as mutual funds, stocks or other investment options to earn returns and not keep the money idle. However, decisions on where and how much to invest should be decided post analysis of future financial goals, the time aspect and the amount in hand. Savings are also very helpful for the rainy days to meet unforeseen circumstances.

Lastly, the wants: 30% for wants: The last segment is wants. It includes those things and items that are not considered to be essential for survival but are important from the entertainment perspective. These are like the luxuries of life and include movies, and events, dining out, vacations, or spending on high end and expensive gadgets like mobile phones, tabs or gaming consoles. So, basically, wants are desires that makes life comfortable and in today's world, these are very much a part of life.

The 50/20/30 budget rule  is very simple and the best part is that it is very easy to follow too. However, the sooner one incorporates this into their life and their budget plan, the better it is as it inculcates a habit of discipline in terms of management of finance. Another aspect of this rule is that it can be used by people of all age brackets as well as all income brackets.  However, one who wishes to follow this rule should bear in mind that it should be followed seriously. Small tweaks or changes may be required to be implemented to fit these categories and balance out the expenditures.

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