Imagine your monthly paycheck as a pie. You can enjoy your favourite slice now, but you also need to save some for later and cover the essentials. The 50-30-20 rule simplifies the art of dividing that pie—so you get the most out of today without worrying about tomorrow. This timeless method can help you build a balanced, financially secure life in India’s ever-growing financial landscape!
What Is The 50-30-20 Rule Of Budgeting?
The 50-30-20 rule is a simple budgeting method that divides your income into three broad categories to help manage personal finances effectively. This article explains the rule along with relevant examples.
The rule suggests:
- 50% of your income should be spent on needs.
- 30% should be allocated to wants.
- 20% should go toward savings and investments.
The 50-30-20 rule was popularised by Elizabeth Warren, a U.S. senator and former Harvard law professor, along with her daughter, Amelia Warren Tyagi. They introduced the rule in their 2005 book “All Your Worth: The Ultimate Lifetime Money Plan.”
The goal of this rule was to provide a simple, easy-to-follow framework for managing personal finances that could be applied to a wide range of income levels.
Here’s a breakdown of how the 50-30-20 rule applies with examples.
1. 50% on Needs (Essential Expenses)
These are necessary expenses that you can’t avoid. In India, this might include:
Housing: Rent or home loan EMI (Rs 10,000-Rs 30,000 in a metro city like Mumbai or Delhi).
Groceries: Rs 4,000-Rs 10,000 per month for a small family.
Utilities: Electricity, water, mobile phone, internet bills (Rs 2,000-Rs 5,000).
Transport: Public transport or car loan EMI and fuel costs (Rs 3,000-Rs 10,000).
Healthcare: Monthly health insurance premium or medical expenses (Rs 1,000-Rs 3,000).
For someone earning Rs 50,000 per month, 50% would be Rs 25,000, covering these essentials.
2. 30% on Wants (Discretionary Spending)
Wants are non-essential items that enhance your lifestyle. These could include:
Dining out or ordering in (Rs 2,000-Rs 5,000 per month).
Travel and leisure, such as vacations or weekend trips (Rs 5,000-Rs 10,000).
Entertainment: Movies, streaming subscriptions (Netflix, Amazon Prime, etc.) (Rs 500-Rs 2,000).
Shopping: Clothing, gadgets, and lifestyle purchases (Rs 2,000-Rs 5,000).
In this scenario, for someone earning Rs 50,000, 30% would be Rs 15,000 for such discretionary expenses.
3. 20% on Savings and Investments
This portion should be allocated toward building your financial future, such as:
Savings: Regular deposits into a savings account or emergency fund.
Investments: Mutual funds, stocks, fixed deposits, etc.
Debt repayment: Pre-paying loans or credit card bills beyond the minimum payment.
For a Rs 50,000 monthly salary, 20% would be Rs 10,000, which could go into:
Emergency Fund: Rs 2,000.
Investments: Rs 5,000 in mutual funds or stocks.
Loan prepayment: Rs 3,000 towards pre-paying a personal loan or credit card.
For Example;
Ravi earns Rs 60,000 per month living in Gurugram, a metro city. Here’s how he can use the
50-30-20 rule:
1. Needs (Rs 30,000):
Rent: Rs 15,000.
Groceries and Utilities: Rs 10,000.
Transport: Rs 3,000.
Healthcare: Rs 2,000.
2. Wants (Rs 18,000):
Dining out and entertainment: Rs 6,000.
Travel: Rs 7,000.
Shopping: Rs 5,000.
3. Savings and Investments (Rs 12,000):
Mutual funds/RD/FD/Gold: Rs 5,000.
Emergency savings: Rs 3,000.
Prepay loan or SIP: Rs 4,000.
By following the 50-30-20 rule, Ravi ensures he covers his necessities, enjoys his lifestyle, and invests in his financial future.
The 50-30-20 Rule Caution
The 50-30-20 rule is a simple and effective budgeting guideline, but it has limitations that require caution. It may not suit low-income earners whose essential expenses exceed 50%, or high-income earners who could save more than 20%. It doesn’t address individual financial goals, like paying off debt or saving for large purchases, and may not account for the high cost of living in certain areas.
Additionally, distinguishing between “needs” and “wants” can be subjective, and the rule might discourage aggressive saving for wealth-building or retirement. It’s best to view the rule as a flexible starting point and adjust it according to personal circumstances.
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