It is a long known conflict on how to manage one’s expenses over time. It is considered to be a rare case scenario, that one is able to fully manage their expenses fulfilling all their needs alongside. Needs here range from the mandatory or primary needs that are unmissable while the other are the secondary or additional needs one tends to spend for fun and luxury. And somewhere between all this is what makes it difficult i.e to find a proper balance between the two needs. People tend to overspend on their luxuries leading them into crises over money every now and then.
The 50,30,20 rule for budgeting can be said to be a straightforward strategy for better money management. The post-tax money you retain should be divided into three spending categories: 50% for necessities, 30% for wants and 20% for savings. This is definitely not a rigid rule that must be followed, however, a basic guideline rule that assists you with building up a monetarily solid financial plan for the future.
By following this rule, you can put your money to better use and keep your expenses balanced across all of your main spending areas. Additionally, by focusing on just these three major categories, you can avoid spending time and developing unnecessary stress over trying to comprehend every detail of your expenses. To put it another way, it aids in the development of a planned spending pattern. Thus, increasing your savings by helping you reach your financial goals. No matter if the financial goals are long or short term, following this technique sorts things out for the better.
Let us have a detailed look on this 50,30,20 budgeting concept:
- 50% of Necessities
This institutes the bills which absolutely need to be paid at any cost. They are the things which you need to survive. These include from making payments for your car or mobile recharge to rent or mortgage of your house. Groceries, health insurance and the minimum debt payment also comply in this category of “needs”. In short, the things you need for living a basic life daily constitute this category. Things like your television subscription shows or eating out are not included in the “needs” category. A big part of your after-charge pay ought to be all that you require to cover your necessities and commitments.
Assuming that you are spending more than the required percentage on your requirements, then you should either eliminate needs or attempt to cut back your way of life. Maybe to a more modest home or more unassuming vehicle. A solution might be to carpool or use public transportation to get to work. You can cut down on dine outs and cook more often at home.
- 30% of Wants
Wants can be considered the additional expenditure which are not significant. It is more of a voluntary expense. This ranges from outings to eat and watch movies to pampering yourself with the latest electronic device or holiday travel. It is not anything specific and includes uncountable ways of spending money depending from person to person . Getting yourself a luxury handbag or buying tickets for a concert, the variety has no end.
If you want to cut down, anything in the “wants” bucket is optional. Instead of spending money on your monthly subscribed gym membership, you can exercise at home. Other alternatives like preparing your own meals at home or watching sports on television instead of purchasing tickets can also help you save some of the additional bucks or financial planning.
“Wants” here does not just imply spending money for entertainment purposes only. It also deals with the essence of upgradation you make in life for betterment. Choosing to buy best quality meat or have expensive seafood, switching to high quality internet speed all comes under the umbrella of what we call our wants. All of these additional extras you buy to make your life more enjoyable and entertaining than before are wants. It also increases your social status as you upgrade to a better social position.
- 20% of Savings
Last but not least, you should try to put 20% of your net income into savings and investments. This incorporates adding cash into your bank investment account or making investments into mutual funds or the stock market. In the event of a job loss or any other inevitable circumstance, you should have a monetary backup of at least three months worth named after emergency savings on hand. At the same time, try to focus on retirement plans and achieving additional future financial objectives after that. You can start off with short term investment plans at first, while with some experience turn up to seek for long term investments.
It is important to keep in mind that the emergency fund account should be refilled as soon as possible if emergency funds are ever utilized.
Even though the “needs” category includes the minimum payments, any additional payments or reimbursements from debt payments count as savings because they reduce the principal and future interest owed.
Conclusion
Over time you can make a gradual shift by switching 20 percent of savings with 30 percent of wants. This shift will take time as you need to change your entire current lifestyle for it. The rule could then be read as follows: 50% for needs, 20% for wants, 30% for savings, and so on. You can continuously make your own emphasis of this standard according to your reasonableness. However, you should guarantee that something like 20% or more of your income, post-charge pay surely goes towards the savings by hook or crook.
You will be able to exercise due diligence in your financial affairs by adhering to this simple yet effective 50-30-20 rule and guarantee that all of the funds are not merely spent. You will be able to exert greater control over how you want to spend your money. As a result, you will become more mindful of your spending habits once you know the percentage of your cash inflow and outflow in accordance with your expenses. To maximize your earnings, ensure that each section is balanced with this rule. And as Warren Buffett says,
“Do not save after what is left after spending, but spend what is left after saving” – Warren Buffett
Thus, saving and investing for the future is not just managing your expenses but also a way of life. It makes a man more rational and stable in all means. There is no such thing as “the best time to save” but the earliest one starts off building this habit, the helpful will be in the long run.
