What amount of your income should you save? That is a question that we all have. Dividing your money into the ratio of your needs, wants and investment is hard. And this is the first part of financial planning, knowing your needs, wants and how much you should invest. So here comes the 50/30/20 budgeting rule, which helps you understand how and for what purpose you should allocate your percentage of income.
So let’s start, the 50/30/20 rule was popularized by Senator Elizabeth Warren, in her book “All Your Worth: The Ultimate Lifetime Money Plan”. Through this rule, she has tried making financial planning simple and accessible to all. This rule is so simple to apply that people from non-finance backgrounds can also adopt it easily in their life.
So this rule says that 50% of your income should go towards fulfilling your needs,30 % of your income should go towards your wants, and you should save the rest 20% of your income. The word income when referred to under this rule is income after paying your taxes, also if you may have multiple sources of income then you should add up all the income and then apply the following rule to the whole collective income. This rule helps you limit each expense under their limit, helps to develop financial discipline in you, as well make sure you have money for fun, and you plan for your long term goals.
Let’s take a look at each bucket in detail:
1- 50% for Needs – Needs include all your first priority payments and are a must for your survival this may include your groceries bills, paying rent, children’s school fees, mortgage insurance premium etc. Allocating a higher budget of income for needs is necessary as otherwise, you can go under debt or just end up increasing your obligations. Needs should include things such as a tv subscription or Netflix subscription, only things that are necessary for survival. In case your needs exceed 50% of your income then you need to deduct the following from your wanted percentage of income. And in case your needs are less than 50% of your income then you may either spend it on wants or save it. Also things such as building an emergency fund or buying insurance fall under necessities.
2- 30% for Wants – Wants are the things you wish for, this may be with the aim of increasing your quality of life. Buying Netflix, tv subscription, gym membership, travel etc. The 30% Allocation of income has been made to make sure that you don’t miss out on the fun of life, or don’t have to compromise on your lifestyle. Also limiting the amount for wants make sure that you don’t overspend. It is better to make a priority-wise list for the items that you wish for and then you can buy them priority-wise. Also if the thing is very expensive such as a new iPhone still in temptation you shouldn’t change your allocation, for such things you can save money from wants and then buy it.
3- 20% for Savings – This is probably the most important allocation that you are going to make, this will secure your future and long term goals. Also first you need to build an emergency corpus. You may also divide your savings allocation for different goals such as 5% towards your children’s education fund, and the rest 15% maybe towards your retirement fund. You won’t work for a lifetime and you would need to retire, so creating a retirement fund is absolutely necessary. If you save enough the next thing would be making your savings work for you, you may invest your savings elsewhere so that they appreciate in value. Also make sure you diversify your savings, as to keep your hard-earned money safe.
Conclusion – This rule is among one of the best budgeting rules out there, one who practices it achieves financial freedom. Hope it will help with your goals. Also, make sure you strictly follow the allocation rule. .
So let’s start, the 50/30/20 rule was popularized by Senator Elizabeth Warren, in her book “All Your Worth: The Ultimate Lifetime Money Plan”. Through this rule, she has tried making financial planning simple and accessible to all. This rule is so simple to apply that people from non-finance backgrounds can also adopt it easily in their life.
So this rule says that 50% of your income should go towards fulfilling your needs,30 % of your income should go towards your wants, and you should save the rest 20% of your income. The word income when referred to under this rule is income after paying your taxes, also if you may have multiple sources of income then you should add up all the income and then apply the following rule to the whole collective income. This rule helps you limit each expense under their limit, helps to develop financial discipline in you, as well make sure you have money for fun, and you plan for your long term goals.
Let’s take a look at each bucket in detail:
1- 50% for Needs – Needs include all your first priority payments and are a must for your survival this may include your groceries bills, paying rent, children’s school fees, mortgage insurance premium etc. Allocating a higher budget of income for needs is necessary as otherwise, you can go under debt or just end up increasing your obligations. Needs should include things such as a tv subscription or Netflix subscription, only things that are necessary for survival. In case your needs exceed 50% of your income then you need to deduct the following from your wanted percentage of income. And in case your needs are less than 50% of your income then you may either spend it on wants or save it. Also things such as building an emergency fund or buying insurance fall under necessities.
2- 30% for Wants – Wants are the things you wish for, this may be with the aim of increasing your quality of life. Buying Netflix, tv subscription, gym membership, travel etc. The 30% Allocation of income has been made to make sure that you don’t miss out on the fun of life, or don’t have to compromise on your lifestyle. Also limiting the amount for wants make sure that you don’t overspend. It is better to make a priority-wise list for the items that you wish for and then you can buy them priority-wise. Also if the thing is very expensive such as a new iPhone still in temptation you shouldn’t change your allocation, for such things you can save money from wants and then buy it.
3- 20% for Savings – This is probably the most important allocation that you are going to make, this will secure your future and long term goals. Also first you need to build an emergency corpus. You may also divide your savings allocation for different goals such as 5% towards your children’s education fund, and the rest 15% maybe towards your retirement fund. You won’t work for a lifetime and you would need to retire, so creating a retirement fund is absolutely necessary. If you save enough the next thing would be making your savings work for you, you may invest your savings elsewhere so that they appreciate in value. Also make sure you diversify your savings, as to keep your hard-earned money safe.
Conclusion – This rule is among one of the best budgeting rules out there, one who practices it achieves financial freedom. Hope it will help with your goals. Also, make sure you strictly follow the allocation rule. .