When it comes to budgeting, there’s no one size fits all solution.
Personal finance is personal after all; we all have different incomes, desires, attitudes, and approaches to how we handle our finances and pursue our financial goals.
If you’re the kind of person who prefers a relaxed, somewhat hands-off approach to budgeting, the 50/30/20 budget rule may be a good fit for you.
What is the economy?
An economy is a territory of the creation, convenience, and exchange, just as utilization of products and enterprises by various specialists. If time management is important, like managing money is also important; otherwise, there won’t be any source left to fulfill our basic needs or to live life luxuriously.
So what is finance?
Finance is characterized as the management or administration of money and incorporates exercises like contributing, acquiring, loaning, planning, saving, and determining. To manage the finances, budgets are set or made by higher-ranking individuals for the country’s proper functioning.
50/30/20 Budget Rule
In 2005, A book was written by Elizabeth Warren named “All your worth: The ultimate lifetime money plan” was published, which spoke about the 50/30/20 budget rule. This rule states that after paying your income tax, one should divide his/her expenditure into three categories :
- 50% of the income should be devoted to “needs.”
- 30% of the income should be devoted to “wants.”
- And, the rest 20% of the income should be devoted to “savings”. This includes retirement savings.
- Please mark that the separation should take place after paying income tax, i.e. with the leftover money.
One thing I want to mention is that the 50/30/20 budget may not be the best budget when dealing with variable income. With income fluctuation, you may want something that isn’t as percentage based.
What Are Your Needs in Your Budget?
Needs can include the basic necessities for the survival of an individual. Needs are something that can’t be ignored or can be deferred for the future. Needs might include EMI payments, loan rebates, rents, school or college fees, insurance, groceries, health care, and basic utilities. Only 50% of your after-tax income should comprise your needs, but if you are spending more than 50% on your needs, then you need to cut down some of your expenses.
What Are Your Wants In Your Budget?
Wants can be defined as something which is not a basic necessity for the survival of a living. They don’t come under the must-have category. Wants are something that comes under your bucket list. For e.g., shopping, events, vacations, OTT subscriptions, and many more. Only 30% of your after-tax income should comprise your wanted items, or else you won’t be able to save anything.
Why is Saving Important For Your Budget?
Savings is a must for living as nobody knows when you may need money. Something can happen all of a sudden unknowingly, and we must be prepared for the same. In order to invest somewhere in large amounts, we must take small steps by saving 20% of our after-tax income.
Benefits of the 50/30/20 rule
- This rule teaches us how to manage our hard-earned money.
- It helps us in adjusting our expenditure according to our needs.
- It helps us in segregating our basic necessities into needs and wants.
- It enables us to save a minor section from our after-tax income, and saving is good if you get used to it.
- It enables us to track down the expenses that we have made.
- It provides freedom and flexibility in terms of managing money.
50/30/20 Rule is Beneficial to Which Section of Society
This budget is best suited for individuals who are living a stable life. Individuals who are or are satisfied with their after-tax income. Whose needs can be fulfilled within 50% of the after-tax income? Otherwise, there is a section in our society whose expenditure is much more than their income.
There are many people who work day and night to fulfill their basic needs, i.e. just to earn food for themselves. They don’t have enough resources to save for themselves.
Therefore, this budget best suits the individuals who have a higher status in the society can easily fulfill their needs among the 50% of their after-tax income.
Disadvantages of 50/30/20 Budget
- It’s quite insignificant
It’s quite easy to adjust according to the 50/30/20, but if you are a high earner, you might spend unnecessarily on your needs.
- It does not support debt-payoff
The following downside of utilizing the 50/30/20 planning strategy is that it doesn’t leave a lot of space for debt-payoff.
- It can’t be followed forever.
50/30/20 budget is not a long term method that can help you in managing your hard-earned money. For example: On the off chance that you need to resign sometime in the future, handle a startling cost, or take your family on a pleasant excursion, you’ll need to help your investment funds rate.
Alternatives Budget Strategies
You must know about alternative budget strategies to determine whether the 50/30/20 budget option is best for you.
Zero Based Budget
The zero based budget is popularized by Dave Ramsey. The idea is that your income and expenses should be zero at the end of each month. You can use the Dave Ramsey budget percentages to understand where all your money that has a job needs to go.
Pay Yourself First Budget
You may also have heard of the pay yourself first budget. With most budgets, you are prioritizing your expenses. With this budget, you are thinking of paying yourself first. It can shift the way that you think about money and saving.
80/20 budget
80/20 budget is a modified version of the 50/30/20 budget rule. In which there is no need for an individual to divide his/her needs and wants and can simply save 20% of the income and spend the rest with full freedom.
The Bottom Line
Saving money is not as easy as we often get unexpected expenses from life. However, a person would be having a good plan for managing their after-tax income if he or she follows the 50-20-30 rule.
Moreover, you can customize this rule according to your own needs and wants. For instance, if you want to increase your savings, then you just have to find a method by which you can lower down your expenses.
You shouldn’t live like a frugal person all the time, as you also need to enjoy your life. However, having set plans and targets would help you live freely even after your retirement. Moreover, this can lead to a happy and fulfilling life.
