There is no rule of thumb that you can apply to solve all of your life’s problems. But you can indeed solve some of your financial problems. An average person working a 9 to 5 job wants to solve many of their problems.
But as soon as the third week of the month arrives, they can hardly find any money in their wallet or debit cards. But the 50 30 20 rule can help them solve this problem. How so? You will find out the answer to that once you read this article.
Since the problem is related to your finances, you have to find a proper financial solution. 50 30 20 rule of money offers a beneficial financial solution to you, helping you outline your money. So, go through this article to find more information on the same.
What Is 50 30 20 Rule Of Money?
Again, first, I want you to remember that the rule of money is no hard and fast rule. However, there are certain perks of using it. The rule is applied to your post-tax earning.
You have to first use the tax calculator to find out about your post-tax income. Going through this calculation will offer you a clean number to use as the amount you can spend in the month. Now, you have to divide the post-tax earning into three different categories to balance and streamline your spending.
No, the 50-30-20 rule does not do any magic and miraculously helps you amass wealth. However, thanks to this division in your earning, you can better structurize your spending and track where you are putting your money. Thanks to this rule, you will also be able to better reach your financial goals.
The idea originated with Senator Elizabeth Warren from the US. She wrote in her famous book called ‘All Your Worth: Ultimate Lifetime Money Plan‘ that you do not need a complex financial plan to outline your money.
According to this rule, a person needs to spend 50% of their post-tax income on their personal needs. They need to spend 30% of the post-tax income on things that they want, and the rest of the 20% is left for savings and investment. But how do you better outline each of these portions? Go through the section below to have a clear idea –
50% On Needs
50% of your post-tax income needs to be spent for survival needs. These expenses should include expenses that you cannot live without. There are so many personal obligations we need to take care of to keep on living. These obligations include different expenditures such as – paying bills, paying rent, fetching groceries & food, insurance premiums, paying the mortgage, minimum debt repayments, etc. These are some of the expenses you cannot live without.
According to the 50 30 20 rules, you have to spend 50% of the after-tax income on different needs that allow you to live peacefully. However, if half of your income does not cover the monthly spending you need for survival, these obligations will pile up.
However, 50% of the earning does not include things like a Netflix subscription, gym membership, or expenses on your cat. If 50% of your after-tax income is not able to pay for the needs, you need to deduct some money from the 30% want section. If 30% of the want section is not enough to cover your needs, you need to lower your lifestyle.
Here are some of the common expenditures that come under the need section where you spend 50% of your after-tax income –
- Utilities like water bills, electricity bills, etc.
- Children education expenses
- House or car EMIs
- Insurance expenses
30% On Wants
The second portion of the 50-30 20 rule of money involves 30% of your after-tax income. This section of expenditure is not elemental to your survival. However, these are further luxuries you indulge in to make your life more enjoyable. These are luxurious expenses you can live without. The second portion of the rule of money deals with certain things you want but do not need for survival. Here is a list of some possible things –
- Entertainment ( movie tickets, Netflix, or Amazon Prime)
- Luxury dinners.
- Gym membership
- Buying new gadgets and techs.
There is no end to the options you have in the want section. You can buy a luxury watch instead of a quartz watch that is cheaper; or an SUV instead of a cheaper hatchback. You can keep 30% of your spending on things you want to spend on. However, you are under no obligation to keep spending on different items you want. In fact, you can also control this part of the expenses and add them to the investment or savings portion.
20% On Savings
Although the last part of the 50 30 20 rule has a lesser percentage of your after-tax income, it is the most crucial portion. You can secure your future using these portions. You have to use 20% of your after-tax income to save up for the future and invest it mindfully. The savings portion will ensure that you keep on living the same quality of life in the future as well.
So, how do you use 20% of your after-tax income to secure your future? You save it and invest this portion of money in different ways. Here are some examples –
- Emergency Funds
- Make investments in mutual funds, gold, ETFs, and stocks.
- You can put your money in different tax-saving funds like PPF, ELSS, and NPS.
- Loan Prepayment
- Plan for children’s education, marriage, retirement, and more.
Survival obligations are very crucial. But you cannot compromise on the savings part. When any crisis comes into your life, you need something to fall back into. Your savings using 20% of the after-tax income will come in handy at that time.
50 30 20 rule does sound very intriguing. But in reality, it might not be that easy to keep delegating your after-tax income this way. This rule is applicable to people with a steady and healthy source of income. So, if you think that you can take care of your ends meet using half of your monthly income, then this rule of money might be helpful for you.
I hope you have found the answers you were looking for. But if you need us to answer any further queries, please reach out to us through the comment section. We will get in touch with you as soon as possible.