The 50/30/20 is a simple budgeting rule for your budget. In this rule you have to divide your income into 3 parts.
1. 50% needs of your after-tax income
2. 30% wants
3. 20% savings or investments
Creating a budget is a good thing, which means you are giving value to your money. But If you don’t know How to create a budget and You are confused about How much money should I spend? And How much money should I save?
Let me help you How you can create a simple but effective financial budget in an easy way
1. What is the 50/30/20 rule?
The 50/30/20 rule is a budgeting rule. This rule was popularized in 2005 by Elizabeth Warren in one of her books, All your Worth: The Ultimate Lifetime Money Plan.
The basic principle of this rule is to divide your after-tax income into three parts. Needs(50%), Wants(30%), Savings(20%)
2. Spend your 50% of income on needs
First let’s talk about what are needs? Needs are those expenses which you have to pay it anyway to live, What can be those needs
2. Rent or Mortgage payment
3. Utility bills
4. Car Payments
5. Health Care
So These the example of needs which is needed on day to day basis
Try not to spend more than 50% money on needs
3. Spend your 30% of income on wants
Now Let’s talk about wants, Wants are those unnecessary expenses which you spend in order to fulfill your desires, What can be those wants
2. Going to watch movie
3. Buying Latest Gadgets
4. Installing high speed internet connection
5. Salon Hair Cuts
Why include wants because if you are young or even if you are old People want to live luxurious life But one thing to keep in mind Don’t overspend
I mean If you are thinking that This is my income from my first job. Let’s party and party and after spending your whole money. At the end of the month you realize that you don’t have a penny in your pocket.
Look at this List, The one thing which you might observe that I can live without doing all these expenses or you can cut down some of your (want expense) by doing this
1. Instead of going to theater, Sit at home and Enjoy watching movie on T.V
This saves your Petrol expense, Pop Corn
2. Instead of Buying Latest Gadgets, Buy at least one or two year old gadget
This saves your money at least 10-20% money depending upon How older the version of that Gadget
4. 20% Savings or Debt Repayment
Finally the last 20% of your income, In this 20% first repay debt
The charges on your credit card is neither your need nor your want
Some amount of money goes for the personal loan, So first repay all the debt which you took from others and save the rest of the money.
You can also invest the rest of that money in things like the Stock market and mutual funds.
But Before investing in anything
One thing you have to keep in mind that you should have at least 6 months of savings on hand in case of bearing a huge loss in business or losing your job or even worst situation could occur
5. An Example of 50/30/20 rule
Let me give you an Example. If you are earning $5000 a month
Now The amount of money you should spend on needs is $2500
The amount of money you should spend on wants is $1500
The amount of money you should save is $1000
You can also calculate your budget using this 50/30/20 rule calculator
6. Does it work in your case?
May be or maybe not depending upon your situation What your situation is Depending upon How much money you are earning
Depending upon What your needs are? What are your wants? Depending upon How much you are saving Depending upon How much you are spending
Let suppose your needs are more than fifty percent(50%) of your income For Example: If your monthly home rent is already more than 50% of your income, This is only one expense
Now here in this case, The 50/30/20 rule does not work in your case
Must checkout: How to earn extra $1000 at home
7. What is the alternative of this rule?
Now what to do if your needs are more than 50% of your income, or your wants are more than 30% of your income
First If your needs are more than 50% of your income, Simply shift from 50/30/20 rule to 80/20 rule
Now in 80/20 rule, (I am not talking about 20% of your efforts gives you 80% of the results), I am talking about divide your budget into these 2 parts
1. 80% of your income cover your needs
2. 20% of your income goes to savings and Debt repayment
You can change the rule from 80/20 rule to 75/25 rule
Simply The 75/25 rule is a rule to budget your money by dividing it into two parts
The first part is to spend 75% of your income into your needs and save or invest 25% of your income
First of all we know what the 50/30/20 rule is? 50/30/20 rule is a rule of budgeting where you spend 50% of your income on needs and 30% of your income on wants/desires and save or invest 20% of your income
Then we discuss what are your basic needs? Now the needs can be anything that includes your day to day needs. Needs can be Food, Health, Transportation, Utility bills, Rent or mortgage, Car payments, Maintenance, Education Electricity, Water, Gas, Internet bills
Then we discuss what are your wants? Wants are your desires on which you spend money to live a happy life. Wants can be vacation, watching movies, High-speed internet connection and buying latest gadgets What we also discuss how you can feel the same enjoyment of your wants with less more
Then we discuss about 20%, Your 20% goes for your savings, investment and loan repayment, It depends on which category do you fall?
Then we discuss an example of a normal person and tell you how you can spend your money on needs and wants and save the rest amount of money
Finally, we discuss the alternative of the 50/3020 rule If you do not fall into the category of 50/30/20 rule then you can apply 80/20 rule where 80% of your income goes to needs and 20% of your income goes to savings and investments
Then another alternative is 75/25 rule where 75% of your income goes to your needs and 25% goes to savings and investments