Savings don’t have to be difficult, nor should they take up hours of your time. In reality, the best strategies to budget are often the most basic. Take the 50/30/20 rule, for example. The 50/30/20 rule is a simple monthly savings approach that informs you precisely how much to put towards savings and living expenses each month. You can implement this rule while investing in a savings plan.
You can securely prevent overpaying and build up your savings over time with a clear big-picture summary of your savings for the month—all without meticulously logging every single purchase.
If you’ve ever downloaded a budgeting tool only to ditch it by the third day, the 50/30/20 strategy could be worth a go. It’s one of the most effective money-saving strategies we’ve discovered, and here’s how it works.
What is the 50/30/20 rule?
The 50/30/20 rule is a simple budgeting approach that can help you manage your money successfully, simply and long-term. The general idea is to split your monthly after-tax income into three categories: 50% for necessities, 30% for desires, and 20% for savings or debt repayment.
You can put your money into a savings plan more effectively if you maintain your costs balanced throughout these major spending categories on a regular basis. And by tracking just three basic areas, you may spare yourself the effort and frustration of delving into the minutiae every time you spend.
“Why can’t I save more?” is a frequently asked budgeting question. The 50/30/20 guideline is an excellent method to tackle the age-old conundrum and provide discipline to your spending patterns. It can help you attain your financial objectives, whether you’re saving for a rainy day or paying off debt.
1. 50% on Needs
Needs are the costs required for an individual’s survival. Thus, according to the 50-30-20 rule, an individual can spend 50% of his income on his requirements. These expenditures include things like:
- Rent
- Utilities such as Electricity, Water bills
- Transportation Cost
- Groceries
- House or Car EMIs
- Children’s Education
- Insurance Expenses
Needs should only comprise costs that allow you to maintain a minimum level of life while meeting all of your commitments. These do not cover dining out, entertainment costs, lifestyle costs, and so on.
However, there is always the risk that an individual’s demands will exceed 50% of his income. Though this is undesired, it does provide a person with a few choices, like cutting down on pleasures, looking for ways to improve his income, or looking for alternatives where he may have to reduce his existing lifestyle.
2. 30% on Wants
Wants are all the costs that an individual incurs that are not required for living and might be called luxuries of life. Wants encompass any costs that spice up one’s life and make it more joyful. Costs of one’s wants may include any of the following:
- Entertainment Expenses like Movies or Netflix
- Dining Out
- Gym Membership
- Shopping
- Holidays
Wants can also involve costs when an individual decides to spend money on products that have cheaper alternatives, such as purchasing luxury timepieces over conventional watches or spending money on an SUV rather than a smaller, budget-friendly car. If an individual discovers that he is spending more than 30% of his income on desires, he might search for ways to cut down on costs.
However, with a 50-30-20 budget, keep in mind that this guideline does not require you to cease enjoying your life by spending on products that bring you pleasure. However, it is a tool that allows a person to monitor and regulate his spending patterns.
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3. 20% on Savings
While your needs and wants make for your current self, money in this area cares for your future self. All of the money saved in this category assures that the future self is taken care of even if they lose work or become ill in the process. This permits them to maintain the same standard of living that they now enjoy. Saving may involve the following:
- Emergency Funds
- Tax savings plan Funds like Provident Funds, NPS, ELSS
- Mutual Funds or Stocks
- Loan Prepayment, i.e., money more than your monthly EMI
Saving aids a person in achieving long-term objectives such as home ownership, marriage expenditures, retirement money, children’s college education, and so on.
If you’re looking for a way to make better savings, then you must check out the iSelect Guaranteed Future Plan by Canara HSBC Life Insurance. This is a life insurance savings plan and protection policy that provides financial stability and security to the client as well as a backup source of savings to help the customer attain his financial goals.
The iSelect Guaranteed Future plan provides guaranteed benefits that will assist the consumer in dealing with any financial uncertainties that may arise in his life. This product’s target market consists mostly of young individuals who are familiar with the internet and like using digital platforms.
The iSelect Guaranteed Future plan will assist a person by providing security for his or her family’s future in the event of unforeseen occurrences, as well as by saving for future financial needs.
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Where did the 50/30/20 rule come from?
The 50/30/20 rule was inspired by current US Senator Elizabeth Warren and her daughter, Amelia Warren Tyagi, in their 2005 book “All Your Worth: The Ultimate Lifetime Money Plan.”
Warren and Tyagi draw the conclusion from over 20 years of study that you don’t need a sophisticated budget to get your money in order. All you have to do is use the 50/30/20 rule to balance your money between your necessities, desires, and savings objectives.
Wrapping It Up
Every individual should use the 50-30-20 guideline as a foundation or starting point to manage their spending. When people struggle to keep their budgets in line, this rule enables them to keep track of their costs, allowing them to save for a rainy day fund, cover unforeseen bills, and prepare for retirement.
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Thus, if a person follows a 50-30-20 budget, he may expect to live a pleasant life in which his expenditures are paid, his future is safe, and he has the capacity to spend on the pleasures that would make life worthwhile.