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.
