What is 50-30-20 Rule? Budgeting Basics

Working professionals can sometimes find it challenging to manage their finances, with salaries barely lasting till the end of the month. Month-ends can be difficult when you have limited funds and pending financial obligations. But you can save smartly using a golden rule of budgeting: the 50-30-20 rule. Read on to learn more about this rule that helps us spend, save and invest money without any financial stress.

Understanding the 50-30-20 Rule

The 50-30-20 rule is a fundamental budgeting technique that divides your income into three areas to help you manage your money. You can pre-plan your budget as per this rule before your salary is credited and then follow the plan over the month.

According to the 50-30-20 rule, necessities like rent, groceries and bills should take up half of your monthly income, i.e. 50%. 30% of your income should be set aside for your ‘wants’ (discretionary expenses), like entertainment or dining out - things you would like to indulge in, but which aren't necessities. Finally, the remaining 20% has to be used for debt repayment or for savings/investments which will assist you in creating a future financial safety net.

How to apply the 50-30-20 Rule?

Here’s how you can apply and follow the 50-30-20 Rule:

50%: Needs

It is important to allocate half your income towards essential expenses or what we call ‘needs’. These are expenses that are required to uphold a basic standard of living that you can't do without. In India, for example, needs may include rent or home loan payments (EMIs), grocery purchases, utility bills, healthcare costs, transportation expenses (like fuel or public transport) and minimum debt repayments like Credit Card bills. 

If over half your income is spent on necessities like bills and groceries each month,​ it might be helpful to look for ways to reduce these costs​. You can think about using public transport more often instead of driving alone​ or purchasing groceries in larger quantities to get lower prices​. The aim is to make sure you're spending only on essential items so that you can manage your budget without having to take out loans unnecessarily. 

One important point to remember is the difference between necessities and desires while making your budget. While essentials like groceries fall under the ‘needs’ category for survival purposes, dining out frequently belongs to the ‘wants’ section.

30%: Wants

The next 30% of your earnings can be allocated to ‘wants’, which are non-essential expenses that enhance life's pleasures but are not vital for your sustenance. In India, expenses such as dining out at restaurants or subscriptions to streaming services, other entertainment options, shopping for latest gadgets, planning holidays etc. can be counted in the ‘wants’ category. These expenses bring you relaxation and enjoyment; however, care should be taken that they do not become financial burdens.

Distinguishing between needs and wants can sometimes be tricky - for instance, owning a mobile phone is essential but feeling the need to upgrade to the newest model every year is more of a want than a need. The solution is not to cut out everything, but to maintain spends within a sensible budget. Dedicating around 30% of your earnings to these important yet non-essential purchases lets you enjoy your passions while staying within your budget.

20%: Savings

It's advisable to set aside the last 20% of your earnings towards savings and paying off debts, as these will help secure your financial future. Having adequate savings helps you prepare for unexpected expenses. In India, this could involve depositing money into a Savings Account, having an emergency fund, making investments in Fixed Deposits, Mutual Funds or Public Provident Fund (PPF) and clearing off high-interest loans and Credit Card bills.

An important aspect of this 20% allocation involves creating a financial safety net for the future and saving or investing for significant milestones of life, like purchasing a home, planning for your children's higher education or creating a retirement corpus. For example, save a portion of your income in an emergency fund to handle unexpected expenses like medical emergencies, so that you can avoid borrowing money in times of hardship. 

Benefits of following the 50-30-20 Rule

• Easy to use

The 50–30–20 rule is simple to understand and easy to use. It is straightforward and can be implemented effectively as compared to other complex budgeting techniques that necessitate meticulous tracking of every expense.

• Smart financial strategy

The 50-30-20 rule helps you keep spends in check by dividing them into three distinct categories: 50% for necessities, 30% for indulgences and 20% for savings to secure your financial well-being in the long run.

• Promotes saving money

Setting aside part of your earnings towards long-term savings or for paying off debts is crucial for establishing financial stability and growth for young professionals in India. This is particularly important for individuals aiming to achieve milestones such as owning a home or launching a business.

• Encourages practical financial choices

The rule specifies that 30% of your budget can be used for discretionary expenses. Having a set budget for such expenses encourages you to make well-thought choices that allow you to enjoy life while also staying within your means. For example, you may choose to eat out twice a month instead of once a week in order to save money without completely cutting out the joy of dining out. 

Conclusion

The 50-30-20 rule is a simple and practical method for managing your money and creating a balanced budget. Always prepare your budget as per this rule before the month starts and then spend according to the preset budget. This rule helps you allocate adequate money for necessary expenses and for safeguarding your financial future while also making provisions for indulgences. Regardless of where you are in your financial journey, this rule offers a simple and straightforward framework for creating a balanced budget.