Budgeting Basics: All You Need to Know About the 50-30-20 Financial Rule

Out of your total income, 50% should be allocated to essential living expenses. These could include basic needs like groceries, rent, utilities, EMIs, insurance premiums, etc. In essence, it includes expenses that are required for a comfortable lifestyle.

If you find that 50% isn’t enough to take care of your needs, you may want to assess your spending habits. Are you buying more groceries than you consume? Are you splurging on non-essential items? Reviewing your expenses can help you cut back on such spends and keep your expenses within the 50% limit.

Besides expenses, if you’re planning to take a loan, stick to 50% as your financial boundary. This means, along with necessities, your loan/debt repayments must be covered with 50% of your income. This will prevent you from dipping into your savings and ensure your budget remains balanced.

30% for wants

The ‘30’ represents the percentage of your income to be allocated discretionary spending or wants. This constitutes expenses on things you want, or which bring you joy, such as travel, hobbies, dining out, entertainment, etc. However, you must exercise restraint and stay within this limit to avoid overspending, which can disrupt your financial goals. If unexpected challenges arise, redirect funds from this category to take care of critical needs.

20% for savings

The ‘20’ here is perhaps the most important as it focuses on financial security. This portion of your income should be reserved for savings, investments, and creating an emergency fund. This includes investments like mutual funds, fixed deposits, Provident Fund, and retirement plans that can help to build long-term stability and plan for expected or unexpected needs.

Why is the 50-30-20 rule important?

When it comes to money, you know you won’t be earning forever. Because of that, you must direct your income towards saving for inevitable events like retirement while safeguarding yourself against uncertainties. The 50-30-20 rule is an effective way to save effectively without compromising on other needs.

However, this ratio is not set in stone, and can be adjusted based on your needs. For instance, you can swap the 30% for investing saving, while allocating 20% for discretionary spends. The more you save, the closer you will be to achieving your financial goals.

On the other hand, avoid increasing your discretionary spends beyond 30% of your income. If adjustments are needed, borrow from this category instead of compromising on essentials or savings. Remember, your savings and investments are essential for a stable financial future.

The writer is Chief Executive Officer, BankBazaar.com