The 50/30/20 rule of thumb for budgeting

In this article, you will know about

What is the 50/30/20 rule of thumb for budgeting

Who invented this rule

Different sections of 50/30/20 rule

Importance of 50/30/20 budgeting rule

Budgeting is an important part of our finance. If your personal finance is not managed properly by proper budgeting, it may either make you rich or make you poorer. How much percentage of the money you earn should be used for your needs, How much money be used for your wants, and how much you should save or invest? For this, there is a simple thumb rule called the 50/30/20 rule of thumb for budgeting. It's not a hard and fast rule but rather a simple guideline on how to manage your finances with proper budgeting.

The 50/30/20 rule was invented by  US Senator Elizabeth Warren. She published this rule in her book, "All your Worth; The Ultimate Lifetime Money Plan". The rule is to split your after tax income into three categories of spending, 50% on needs, 30% on wants, and the rest 20% on savings.

Different sections of 50/30/20 Rule

As per this budget rule, your income after tax is split into three sections. Needs, wants, and savings. Let's discuss about the three sections one by one in details.

1- NEEDS - 50%  of your monthly income after-tax should be used in  your needs. As per the 50/30/20 rule, 50% of your income be used in 

a - Utility bills such as electricity bill, grocery bills.

b - Premiums for your life, health, and motor insurance.

c - Loan EMI payments

d - House rent etc.

Needs are expenses that can not be avoided. These are the expenditures towards basic necessities. 

2 - Wants - 30% of your monthly income after-tax should be used in wants. According to the rule of budgeting you can use 30% of your income in  non-essential expenses, you can live without them. To they are not so necessary.

They are

a - Dining out with family or friends

b - Shopping

c - Holidays

d - Entertainments like going for a movie, Netflix, Amazon prime subsciption etc.

e - Going to spa, Gym membership etc.

3 - Savings - 20% if your monthly income after-tax be used for savings.

This is important and non-negotiable part of the 50/30/20 budgeting rule. This 20% must be used for investments, can be kept for emergency, for retirement planning , child education etc. Investment may include in investing in stocks, mutual funds, bonds, ETFs,  gold, real estates etc.

You can put side some money for your emergency fund, in case of any unfortunate events such as health issue arises that can be used . Put your money in such instruments that can be withdrawn instantly and ensure that you can earn some return from this Investment. You can put your money in liquid funds or can be kept in the savings account with auto sweep facility.

Importance of 50/30/20 rule

This rule gives a better understanding of your budget. How much money you should invest out of your monthly income, how much money be used in your expenses? By following this rule of thumb you can save your money as well as invest your money wisely to maximize your return.