There are various thumb rules that one can use to help them with planning their finances and investments. One such rule is the 50-30-20 rule. This thumb rule can be used to guide you in deciding how much to save and spend in a month.
What is the 50-30-20 rule
This rule categorises your finances into three buckets: needs, savings and wants. Here, 50 per cent of your income should go towards living expenses (needs), like household expenses, groceries; 20 per cent (savings) towards savings for your short, medium, long-term goals; and 30 per cent towards spending (wants), including outings, food and travel. You can tweak the percentages according to your age, circ*mstances, etc.
Also read: 10 financial planning thumb rules
50% bucket
This bucket forms the list of expenses that are of utmost importance and should be given the highest priority. "Up to 50% of your income should be kept aside for your needs. Your needs refer to your essential expenses, financial obligations and other responsibilities. These can include rent, utilities, groceries, healthcare, insurance premium, child's school or college fees and more," according to the ICICI Prudential Life Insurance website.
30% for wants
"Wants represent expenses that are not absolutely required for your living. In other words, all of the expenses that are considered luxuries or discretionary would fall under this category. Since these expenses are not essential for your survival, the rule requires you to allocate only about 30% of your net income," explained HDFC Life on its website.
Also read: 7 actions that can adversely impact your credit score
20% for saving
The last 20% of your income should be allocated towards savings and investments. According to the Kotak Mahindra Bank website: "20% of your monthly income should be saved towards your future goals, investments, and unexpected emergencies like medical treatment, home maintenance, or car repairs. You can have a dedicated bank account exclusively for these savings to avoid using them for other expenses."
How to use the 50-30-20 rule?
The Kotak Mahindra Bank website explains how one can use this rule when planning their finances:
First, calculate your monthly income and then categorise your spending into needs, wants, and savings. The spending threshold for each category should be 50%, 30%, and 20% respectively.
For example, if you earn Rs 60,000 per month, you will allocate Rs 30,000 to your needs, Rs 18,000 to your wants, and Rs 12,000 to your savings and investments. If you find that your spendings for one category is exceeding the threshold, adjust your spending in another category to stick to the 50/30/20 rule.
This way, you can cover your necessities, indulge in the things you enjoy, and work towards long-term financial security, all without compromising your quality of life.
FAQs
Key Takeaways. The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).
What is the 50 30 20 rule in your financial plan? ›
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals.
How does the 50 30 20 rule allocates for income? ›
The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Learn more about the 50/30/20 budget rule and if it's right for you.
How to work out 50/30/20 rule? ›
A 50 30 20 budget divides your monthly income after tax into three clear areas.
- 50% of your income is used for needs.
- 30% is spent on any wants.
- 20% goes towards your savings.
Using them, you allocate your monthly after-tax income to the three categories: 50% to “needs,” 30% to “wants,” and 20% to saving for your financial goals. Your percentages may need to be adjusted based on your personal circ*mstances and goals.
What is the disadvantage of the 50 30 20 rule? ›
It may not work for everyone. Depending on your income and expenses, the 50/30/20 rule may not be realistic for your individual financial situation. You may need to allocate a higher percentage to necessities or a lower percentage to wants in order to make ends meet. It doesn't account for irregular expenses.
What is the rule of 20 in financial planning? ›
Basically, the idea is to divide up your after-tax income and allocate it to 3 general categories: 50% for needs. 30% for wants. 20% for savings.
Is $4000 a good savings? ›
Ready to talk to an expert? Are you approaching 30? How much money do you have saved? According to CNN Money, someone between the ages of 25 and 30, who makes around $40,000 a year, should have at least $4,000 saved.
What is your biggest financial goal? ›
Long-Term Financial Goals. The biggest long-term financial goal for most people is saving enough money to retire. The common rule of thumb is that you should save 10% to 15% of every paycheck in a tax-advantaged retirement account like a 401(k) or 403(b), if you have access to one, or a traditional IRA or Roth IRA.
Is the 50/30/20 rule gross or net? ›
50/30/20 explained. The basic idea of the 50/30/20 rule is simple. You allocate 50% of your post-tax income to “needs” and another 30% to “wants.” That leaves you with at least 20% of your net income that you're able to save or use to pay down existing debt.
The 50-30-20 rule is intended to help individuals manage their after-tax income, primarily to have funds on hand for emergencies and savings for retirement. Every household should prioritize creating an emergency fund in case of job losses, unexpected medical expenses, or any other unforeseen monetary cost.
Can you live on $1000 a month after bills? ›
Bottom Line. Living on $1,000 per month is a challenge. From the high costs of housing, transportation and food, plus trying to keep your bills to a minimum, it would be difficult for anyone living alone to make this work. But with some creativity, roommates and strategy, you might be able to pull it off.
What is the smart asset 50-30-20? ›
The 50/30/20 budget recommends that for sustainable comfort, 50% of your salary should be allocated to your needs, such as housing, groceries and transportation; 30% toward wants like entertainment and hobbies; and 20% toward paying off debt, saving or investing.
What are the 3 P's of budgeting? ›
Introducing the three P's of budgeting
Think of it more as a way to create a plan to spend your money on things that matter to you. Get started in three easy steps — paycheck, prioritize and plan.
What is the 50-30-20 rule of money? ›
The 50-30-20 rule is a common way to allocate the spending categories in your personal or household budget. The rule targets 50% of your after-tax income toward necessities, 30% toward things you don't need—but make life a little nicer—and the final 20% toward paying down debt and/or adding to your savings.
What is the 40 40 20 budget rule? ›
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
Does the 50/30/20 rule include 401k? ›
Important reminder: The 50/30/20 budget rule only considers your take-home pay for the month, so anything automatically deducted from your paycheck — like your work health insurance premium or 401k retirement contribution — doesn't count in the equation.
When using the 50/30/20 rule to budget, what category are loan payments in? ›
When using the 50/30/20 rule to budget, which category are loan payments in? Mortgages, auto loans, and other installment loans go in the “needs” category. So do the minimum payments on your credit card because you have to pay at least that amount every month to avoid fees and negative marks on your credit report.
