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Financial Planning
Got your first salary? Here is how the 50/30/20 Budget rule can help you
Understand and use the 50/30/20 budgeting rule effectively to allocate to your needs, wants, and savings with your earnings.
Key takeaways
- Talking about finances is not only important but essential for financial planning, especially once you start earning.
- A simple budgeting technique is the 50/30/20 rule where 50% of your income must be reserved for needs, 30% for wants, and 20% for saving and investing.
- Budgeting brings about financial awareness about your financial position and helps optimise spending.
- Ensure the budget is realistic, and review and adjust regularly to stay on the right track.
Conversations about finance are usually frowned upon. However, discussing your financial health or planning is no longer taboo! It is one of the most important things you can do. After all, most of what you want to do requires money. Knowing what to do with your earnings is important in this world of endless choices. Temptations constantly surround us; this is especially true once you start earning.
Making the most of your hard-earned money is the essence of financial planning. From taking care of your needs and wants to creating your desired future, it all starts with budgeting. A simple way to begin is by using the 50/30/20 rule. Keep reading to learn what this means and how to use it to live comfortably while creating a secure future.
Understanding the 50/30/20 rule of budgeting
The 50/30/20 budget is very simple. It requires you to divide your after-tax income into three categories:
- 50% on needs
- 30% on wants
- 20% on savings
This promotes financial discipline by encouraging savings and teaches budgeting without creating a sense of deprivation. It also addresses the temptation to limit spending.
50% of earnings
You must set aside 50% of your monthly income for basic needs. It covers rent, insurance, healthcare, utilities, groceries, financial obligations like child education, EMIs, credit card bills, etc.
30% of your earnings
After meeting your needs, you can spend 30% of your income on wants. Any activity you want to do falls into this category, including dining out, shopping, entertainment, and non-essential purchases like watches and electronics, and so on.
20% of your earnings
The last 20% of your income must go to monthly savings and investing. These can provide a safety net for financial emergencies and may help in achieving long-term goals. Having sufficient savings in place may help reduce anxiety, financial stress, and the risk of falling into debt traps.
Using the 50/30/20 budget rule
Now that you have understood the 50/30/20 rule, let's see how to apply it.
Step 1: Earnings
The first thing you must do is understand your monthly earnings. Ensure the income considered here is after paying all the taxes. Go through your bank statement, and you will know the monthly amount you take home.
Step 2: Review your expenses
Review your regular expenses by going through your bank statements from the previous month. Once you have all the expenses in place, make a list of everything that you need and want. Also, note your savings to date.
Step 3: Categorise
Once you have all the information, you can start categorising your expenses into three sections as per the 50/30/20 rule. This is quite easy. For instance, paying your rent and utility bills is a need, while dining out is a want.
Step 4: Set a budget
Now, it is time to implement the budgeting rule. To do this, simply divide your monthly income after taxes into three categories. For instance, let’s assume you earn ₹1 lakh after monthly taxes. So, ₹50,000 can be allocated to your needs, ₹30,000 for wants, and ₹20,000 for savings.
Step 5: Follow, review, and adjust
The final step is to go through a month by sticking to your budgeting rule. Don’t forget to review how the month went. You might realise that the budget set aside for wants is perhaps falling short or your needs are not being met within the 50% dedicated to them. Whatever it is, review and adjust accordingly. The simplest way to do this is by cutting out any unnecessary expenses. Similarly, if you realise you can save more, go ahead and do that.
One thing you must avoid is the belief that you can overdraw from one category and compensate in the subsequent months. Doing this is a recipe for disaster and does away with the purpose of creating a budget. Instead, stick to it and look for ways to make it work.
Conclusion
The budget rule of 50/30/20 is not only easy to understand but simple to implement as well. It is an excellent means to becoming more diligent once you start earning. It also teaches financial discipline while ensuring you enjoy your life and plan for your future needs.
Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.
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