We discussed creating a monthly investment plan in the last week’s edition. Today, let’s discuss budgeting because your finances can go for a toss without a proper budget. And to make it easier for you to make an optimal budget, let’s dig deeper into the 50/30/20 rule!
What is the 50/30/20 Rule?
If you are someone who finds it difficult to gain control over your spending habits and save enough for making investments, following the 50/30/20 rule diligently can improve your finances drastically.
To decode it, this is a rule which states that an individual should direct 50% of income towards basic needs, 30% towards wants or desires and 20% towards savings and investments.
This rule helps put a cap on each of the three categories and ensures that you can fulfil your needs and wants without compromising on your savings and investments for the future. It also imposes discipline in your financial management as you will already know how much to spend and save.
Let’s understand each component in detail:
1. 50% of Income Towards Needs
This component states that half of the income should fulfil one’s necessities. And it is logical to spend half of your income on this component as every individual has some basic needs to sustain.
Spending on basic needs involves groceries, utility bills, rent, food and fuel, insurance premiums, and debt repayments, to name a few.
2. 30% of Income Towards Wants
This component states that almost one-third of your income should go towards satisfying wants.
Wants could have a different meanings for everyone. For someone, it could be dining out twice a month or watching a movie. For another person, it could be holidaying every six months or shopping. Hence, this rule also accommodates spending on leisure activities.
3. 20% of Income Towards Savings and Investments
Speaking from a futuristic perspective, this is the most critical component of this budget. It states that 20% of one’s monthly income should be directed towards savings and investment activities.
Diligently following this budget component will help you gradually build wealth over time as regular investments are being made into various financial products.
The 50/30/20 rule seems simple and easy to follow in theory, but the implementation might be challenging for a few people as it requires a cut in expenditures and an increase in savings. It would lead to an initial short-term pain in finances when adapted, but it will bear fruit in the long run!