“How is it only the 13th of the month, and I'm broke again?” A question that may often arise among people who receive their paycheck on the first day of the month. Even after getting the salary only two weeks ago, the money seems to vanish faster than expected, with expenses such as rent, EMIs, groceries, weekend plans and shopping often leading to a promise to plan finances better next month.
In order to avoid a situation in the future, here is a detailed guide on a budgeting method called the 50/30/20 rule, which may help you plan your finances better.
What is the 50/30/20 rule?
The 50/30/20 rule is a budgeting strategy that divides total income after tax into three categories, where 50% is spent on needs, 30% on wants, and 20% on savings. This rule aims to enable you to meet your financial objectives on time and create a healthy budget for the future while accounting for your needs and wants.
50% for needs
According to the rule, you can use up to half of your after-tax income to handle urgent financial expenses. These are the expenses that are absolutely necessary to survive. Examples include payments such as rent, EMIs, groceries and food bills, insurance premiums and more.
Failing to do so may often lead to penalties or further obligations, hence a major portion of the income is allocated to such expenses.
30% for wants
Approximately 30% of income is dedicated to wants, which are non-essential items a person desires and provides pleasure. These include expenses such as travelling, movies, dining, shopping, etc. With the endless options and luxuries available in the market, it often becomes very tricky to regulate such costs. Unregulated expenses may even hamper one's financial objectives. Hence, the 50/30/20 rule suggests limiting such expenses to 30% of your total income after tax.
20% for savings
Savings are essential for future emergencies and financial security. Hence, the 50/30/20 rule mandates that 20 per cent of your post-tax income must be allocated as savings and utilised as investments. Notably, the type of savings and investment might differ for people across age groups and income levels.
An illustration
For example, let's say you earn ₹50,000 per month. According to the 50-30-20 rule, you can use 50% of your income after tax, which would come to around ₹25,000 for necessities. This may include expenses such as electricity bills, fuel bills, tuition fees, mobile bills, groceries and others. Around 30% of the salary would be around ₹15,000, which can be utilised for wants such as shopping, movies, and dining. The last 20% would come to around ₹10,000 for savings.
Disclaimer: This story is for educational purposes only. The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
