BackHow 50-30-20 rule helps you meet investment goals
50-30-20 rule of budgeting advocates to devote 20 per cent of income for savings, 50 per cent for important and necessary expenses while 30 per cent for those expenses that are important but not necessary
PremiumWhen you have a regular income, it's important to have a planned way of expenditure too. According to tax and investment experts, one can segregate one's expenses into three categories — expenses that can't be stopped, expenses for savings and expenses that are important but not necessary. On the basis of these three expenses, 50-30-20 rule of budgeting of one's income comes into play where one devotes 20 per cent of its income for savings, 50 per cent for important and necessary expenses while 30 per cent of the income is devoted to those expenses that is important but not necessary. Experts went on to add that if handled properly, this 50-30-20 rule of money helps an earning individual to meet one's all types of investment goals with ease.
Speaking on the 50-30-20 rule of money SEBI registered tax and investment expert Jitendra Solankii said, "50-30-20 rule of budgeting is quite popular in the US, Europe and other developed countries but it can be implemented in India too. After all, it helps an earning individual to decide how much he or she should be investing for its various needs. This 50-30-20 calculator advocates to devote 50 per cent of income for important and necessary expenses, 30 per cent for important but not necessary while 20 per cent for the savings."
Solanki said that important and necessary expenses includes that kind of expenses that can't be stopped means your home budget, child school and tuition fee, loan EMIs, etc. These important and necessary expenses will fall in 50 per cent of one's income. Important but not necessary expenses are those that includes weekend hangout, watching movie with family, dine out with the family etc.
On how 50-30-20 rule benefits an earning individual Pankaj Mathpal, Founder & CEO at Optima Money Managers said, "When you have a devoted amount for investment to meet your various goals, then it's for sure that you are putting money in all kinds of options meant for meeting your short-term, mid-term to long-term investment goals. So, the 50-30-20 calculator is useful in meeting all kinds of investment goals. But, in current scenario, when one is saving good amount of money from one's 30 per cent income due to the lockdown and Covid-19 restrictions, it's better to divert that fund into the 20 per cent section."
On how to use that surplus amount Pankaj Mathpal said, "Covid-19 has taught us various social and financial lessons. From financial perspective, it has taught us to have ample amount in liquid form. If someone is able to save from the 30 per cent section of one's income, then it is advisable for him or her to create an emergency liquid corpus that can help him or her to survive for near one year even when he or she has no source of income. Once that liquid need is met, then one can decide as to which investment goal he or she would like to increase and decide on the basis of that requirement."
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