Why You Need the 50-30-20 Rule of Financial Planning & How it Works?

Are you looking to get your finances in order? You may have come across the 50-30-20 rule of budgeting in Financial Planning. This rule is a great way to start planning your finances and ensuring that your spending aligns with your goals.

Although there’s no one-size-fits-all approach to financial planning, the 50-30-20 rule is a general guideline that can help you get started.

You must’ve guessed that this blog post will extensively discuss this budgeting percentage rule. But before getting to know how it works and its importance in your day-to-day life, let’s address the constant battle we all face – Saving vs spending!

How Much to Save & How Much to Spend?

Saving money is essential. It gives you a cushion to fall back on in an emergency and helps you reach your financial goals. But how much should you save? And how to resist the temptations? This is an eternal debate.

There’s no one correct answer to this question. Here comes the golden personal finance rule into play – The 50-30-20 rule. This rule says that 50% of your income should go towards essentials, 30% should go towards wants, and 20% should be saved.

Of course, this is just a guideline. You may need to adjust the percentages based on your unique circumstances. But following this rule can help you figure out how much to save each month.

If you are able to stick to the 50-30-20 rule, you will find yourself with a healthy savings account balance in no time.

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How Does the 50-30-20 Rule of Budgeting Work?

Basically, the 50-30-20 rule helps you manage your money in a way that’s both effective and sustainable.

Here’s how it works:

50% on Necessities

Half of your after-tax net monthly income goes towards essential expenses. These are unavoidable expenses of almost the same value every month.

Some examples of essential or necessary expenses are housing, food, transportation, and healthcare.

If you find your basic expenses exceeding 50% of your net income, you can bend the rule according to your individual circumstances. If possible, you can also look into some of your activities. For instance, try walking to work or downsizing your living arrangements.

30% on Wants

30% of your net income goes towards discretionary expenses like entertainment, travel, and shopping. These expenses are categorized as leisure because you can live without them. But they make you feel alive. Some leisure expenses include vacations, dining out, holidays, shopping, etc.

That’s the beauty of this savings rule of thumb. It lets you save without depriving you of the pleasures of life. You can easily adjust your recreation activities in this 30% bracket. This will also teach you to postpone certain expenses for next month.

20% on Savings & Debt Repayment

The last 20% of your income goes towards fulfilling your financial goals, building a life, and attaining financial security. It may range from savings for emergency and student loan repayment to paying for retirement plans and housing loans.

The sum saved can be kept in a savings account securely. A zero balance digital savings account with no balance would be ideal because it opens up quickly and has no requirements for a minimum balance.

This is the least amount of your income. But without this amount being planned and appropriately allocated, all your other endeavours to make money are useless.

The key is to find the right balance. Suppose you spend more than 50% of your income on essential expenses. In that case, you may need to cut back on some of your discretionary spendings to free up more money for savings and debt repayment.

If you stick to the 50-30-20 rule, you will be on your way to a healthy financial future.

ALSO READ: Best Mutual Funds for 2023

Why Do You Need the 50-30-20 Rule?

Do you still doubt the need to apply the 50-30-20 saving rule of thumb? Well, these are the specific reasons why you need this budgeting percentage rule in your life!

You can fix a specific amount every month to not only save but also to spend. You can build wealth and beat inflation in the long run by consistently investing 20% in the right investment plans.

More and more companies are withdrawing from providing retirement benefits to employees. What does it mean? You are on your own in old age! The 50-30-20 rule equips you with the financial discipline required to save for such rainy days.

Unconventional career choices are popular these days. They give you everything but a guarantee of income. If you follow the 50-30-20 personal finance rule, you can easily survive the days when you don’t get much work. It also gives you a cushion when you want to change your career and earn less money in the beginning.

Disadvantages of poor personal finance

Without a sound financial plan or budget, it is quite simple to spend more than you have. Over time, this could place you in serious debt.

Unexpected things happen to everyone, and frequently these occurrences might result in significant financial outlays. Incompetent money management could lead to tragedy because you are unprepared for such significant costs.

Poor finances can cost you your health. Your appetite, mood, and capacity to focus can all be affected by financial hardship, which can also raise your blood pressure.

Conclusion

50-30-20 rule is one of the best ways to live a stress-free life. It helps us cover our expenses, have some entertainment and save for the future in a systematic way.

Also it is very important that you understand how income tax is calculated on your income to save on your income tax and be systematic in above mentioned approach.

Now you can calculate your income tax from your mobile device!

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Income Tax Calculator App – FinCalC

For Income Tax Calculation on your mobile device, you can Download my Android App “FinCalC” which I have developed for you to make your income tax calculation easy.

What you can do with this mobile App?

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Author Bio:

Naina Rajgopalan has a thing for numbers and a deep fascination to learn about all things finance. She’s been money-wise from a young age and has always shared her knowledge and tips with those around her. Being a part of the content team at Freo Save, a neobank that offers a 7% interest rate on savings along with benefits such as insurance on balance, safe & secure banking, and so on, Naina stays updated with the latest of what happens in the banking and fintech industries. She has taken upon herself to share her knowledge with readers across all walks of life to help them manage their finances and budgets better, so they can make better decisions while spending, borrowing, investing and saving.