What is the first thing that comes to your mind when someone mentions the word budget? For most of the people, it means timely bill payment but a budget is more than that. It is also about figuring out the amount you would be spending on different heads of expenditure. If you are still stuck into the mundane definition of budget, you need to check out the popular 50/20/30 budget rule that was propounded by senator Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan.” It is a simplified and effective rule that makes budgeting a cakewalk for you and lets you keep a tab on your expenses as well as saving goals.
What does the 50/20/30 budget rule state:
The rule calls for dividing the after-tax income into three categories and then utilizing the same for expenditure. 50% of the income should be spent on needs, 20% on savings and 30% on wants. The categorization of needs, wants and savings has been done to help you lead a good life while making sure that your future is secured. This proportional guideline aims to offer a financial solution to people who often find themselves in a fix when they are planning their budget. By summarizing the complex budget process into three simple heads, the 50/20/30 rule truly turns out to be a savior for those who dread budget planning.
50% allocation for needs
The rule asks you to reserve half of your income to spend on absolute necessities of life. These absolute necessities comprise those bills that you have to pay in order to survive. They are indispensable for your living and include groceries, health care, rent or mortgage payment, car payment, insurance, transportation and utility bills. The “needs,” as defined by the rule, include those items and services that are not extra and are essential for everyone. Everyone has to spend on these items irrespective of how much they earn. The only aspect that makes it different for different individuals is their financial status. The bills differ in amount depending on the earning and living standard of the person.
20% for savings
Savings refer to adding money to the emergency fund that you have created for yourself. You should save 20% of your income and keep it in a saving fund account and/or utilize it for investment in a fixed deposit, recurring deposit, mutual funds, stocks or other investment options. Debt repayment may also be called savings as any extra payment that reduces principle and future interest ultimately becomes a saving. Savings are necessary for a rainy day but it should come after you have taken care of the absolute necessities. It makes for a great way to secure your future and it is advisable to get on with it as early as possible.
30% for wants
Wants refer to those things and items that are not essential for survival but have an entertainment value. They make life luxurious and include things that you desire such as dining out, movies, tickets to events, vacation, high-speed internet, expensive gadgets like gaming console, mobile phone and the like. The wants are the desires that you fulfill in order to make your life comfortable. These are extras but in the present times, these things have become a significant part of everyone’s life. Nevertheless, you should take care to ensure that it has minimum items as it would help you in future.
The good thing about the 50/20/30 budget rule is that it is easy to implement and the sooner you get going with it, the better it is. It would help you establish good financial discipline which would prove to be an asset for a lifetime. It does not matter which income bracket you belong to or at what position you are in your job, you can implement it and rest assured that it will work in your favor. The only thing that you should bear in mind is that you do not have to take it literally. Everyone’s lifestyle and needs are different and hence, you may need to customize things a little. Just do a review of your earnings and expenses and follow the 50/20/30 budget rule framework.
So, the right place is here and now! For professional assistance talk to Dr. Finance, through Facebook,Skype, or Google who will answer all your financial queries. Visit Findvise or download the app today to make a financial budget today.
Findvise is a professionally managed robo advisory platform that will analyze your aspirations and finances in the most scientific way and help you to budget your finance in the most gainful manner.