50-30-20 Rule for Budgeting: A Guide to Financial Planning. Friends, saving money is a very important part of wealth building. If we spend all the income that we earn regularly without financial planning, then the chances of our financial future being secure are very low. On the other hand, if we save some amount from our income and invest it regularly, then we can build wealth from that amount in a few years.
Balance Between Savings and Enjoyment
Balance Between Savings and Enjoyment; But this does not mean that if you are planning for the future, then do not enjoy life in the current time. It is also important to fulfill your current wants for your happiness. So in this article, we will talk about the 50-30-20 rule for budgeting, which will help you to create a balance between savings and expenditure.
Why Is Saving Important?
Before talking about this rule, let’s talk about why saving is important and what the benefits of financial planning are. So the biggest benefit of financial planning is the sense of security. Friends, a lot of things happen in life and nothing is fixed.
The pandemic has recently caused a significant number of people to lose their jobs.. we get a sense of security that even if we lose our job, till the time we build another job or another income source, our savings can help us in our survival. Even if your savings are not in liquid form, i.e., not in cash or a bank, even if you have invested in stocks, you at least have peace of mind that you have some wealth.
Achieving Future Goals
Similarly, financial planning helps in achieving future goals. Whatever your future goals are, like buying a house or starting a business, or even planning a trip, financial planning can help you to achieve any of these goals as soon as possible.
The 50-30-20 Rule Explained
Now let’s talk about the 50-30-20 rule for budget and how you should bifurcate your income. In this, income is divided into three categories, which are needs, desires, and financial goals.
50% of Income for Needs
50% of income should be allocated for necessities. Necessities are those things that are essential for survival. Like food, water, house rent, electricity, etc.
30% of Income for Desires
30% of income is allocated for desires. Desires are all those things that you want to spend on but are not necessary for your basic survival. For example, buying luxury items, eating food in restaurants, expenditures on entertainment like movies, Netflix subscriptions, etc.
20% of Income for Financial Goals
And 20% of income should be earmarked for financial goals. In this category, such things are very beneficial in the future. It includes all types of savings, whether it is for house purchase, education, or retirement. If you have taken a loan, then its repayment will also be in this category.
Example of 50-30-20 Rule
Let’s look at an example of the 50-30-20 budgeting rule. Suppose Mr. X’s monthly income is Rs. 50,000. So his 50%, i.e., Rs. 25,000, will be spent on basic needs. His 30%, i.e., Rs. 15,000, will be spent on desires or wants. And his 20%, i.e., Rs. 10,000 will be saved for financial goals.
Financial Planning: How to Create Wealth
Now you might be thinking that we have saved 20%, but how do we do financial planning to create good wealth from this saving amount? For this, you will have to work a little hard, because for this, you should have a good knowledge of financial planning.
Other Saving Strategies
So far we have understood what the 50-30-20 rule for budget is and how to use it. Similarly, there are other saving strategies, such as the 10% rule, the 100 minus your age rule, etc.
10% Rule
The 10% rule is simple. It says that you have to save at least 10% of your salary. And you have to do the rest with the remaining money.
100 Minus Your Age Rule
The 100 minus your age rule is a very interesting rule, but generally, we do the opposite of it. From this rule, we learn that we should not save a fixed percentage of our income but save a variable percentage, which decreases with age.
To calculate the percentage, the age is subtracted from 100. For example, if your age is 25, then you have to save 75% of your income. It is calculated as follows: subtract your age from 100. According to this rule, as you age, our expenditures also increase. That’s why we should save as much as possible in our early years.
Conclusion: Financial Planning Is Key
We have understood an important aspect related to financial planning. Out of all these categories, the 10% rule is the simplest. And the 50-30-20 principle may seem a bit difficult in the beginning, but with time, you can master it.
The main purpose of all these strategies is that if you want to do financial planning for your future, you have to focus on your savings, no matter how much your income is. However, when you apply these strategies, there will be some challenges.
It is possible that the expenses that should be according to the percentage are actually more expensive than that. But if you follow these strategies seriously, then with time, it will become your habit. If you still can’t do it, you may have to change your lifestyle.
For example, if you are spending 100% of your salary, you need to identify the reason behind it. if you are spending excessively on desires, you need to manage it. For instance, your current housing rent might exceed your income. then you can buy a house somewhere else for the time being, where the rent is a bit less.
So in this way, you will have to do financial planning so that you can do something good for your future. So that’s it for today’s article.