50/30/20 Rule

Needs - 50%

Needs encompass the bills you must pay and essentials necessary for survival. These are the basic requirements for day-to-day living that ensure a standard quality of life. If needs exceed 50% of your income, it’s important to either cut down or downsize your lifestyle. Maintaining this balance can lead to a happier life.
Examples of needs are:
• Utility bills
• Rent or mortgage payments
• Insurance and Health care
• Groceries
• Minimum Debt Payment

Wants - 30%

Wants are the enjoyable indulgences we don’t hesitate to spend money on. They’re not necessities but rather things that bring us pleasure and entertainment. This could include subscribing to services like Netflix or Amazon Prime, dining out at restaurants, or planning vacations.

• Subscriptions
• Supplies for hobbies
• Restaurant meals
• Vacations
• Tickets to sporting events
• The latest electronic gadget

Saving - 20%

Allocating 20% of your budget toward your future is crucial. Saving and investing a portion of your net income is vital for ensuring financial security. Savings act as a safety net for unforeseen events, such as job loss or emergencies. These savings can be directed towards retirement funds, investments, or establishing an emergency fund.

• Create an Emergency Fund
• Invest in the stock market or mutual fund
• Setting aside funds to buy physical property for long-term holding
• Making debt repayments beyond minimum payments

How to use 50/30/20 Rule?

1) Calculate Monthly Income

Gross monthly income represents the total earnings received in a month before any deductions, such as taxes. On the other hand, net income is what remains after subtracting all expenses, including taxes, insurance, and other deductions, from the gross income. By calculating net income, individuals can allocate funds toward their needs, wants, and savings effectively.

2) Categorize spending for past month

Spending refers to the allocation of financial resources by individuals, groups, or governments. It’s crucial to analyze monthly income to categorize expenses effectively. This enables the identification of spending patterns and facilitates planning for the upcoming month.

3) Determine the threshold of expenses

Every month entails various expenses, some essential, others frivolous. Recognizing and limiting spending habits aids in saving. For example, categorizing expenses like rent, groceries, entertainment, vacations, and miscellaneous items, and setting aside funds for future use, facilitates prudent financial management. By predetermining expense amounts in advance, one can effectively curb unnecessary spending.

4) Make adjustments to the 50/30/20 rule

Once the threshold for each expense is established, it’s important to align them with needs, wants, and savings. If spending exceeds the allotted amount, consider trimming expenses in the wants category to maintain a balance between needs and savings.

Benefits of 50/30/20 Rule:

1) Easy for Tracking Purpose

The main aim of the 50/30/20 rule is to monitor your spending habits. While it involves mathematical calculations, its primary purpose is to tackle the significant issue of curbing expenses. By addressing the real-life spending patterns of individuals, this approach contributes to securing their financial future.

2) Finds out Affordability

People have diverse aspirations in life, ranging from buying a house or a car to planning vacations or purchasing a bike, among others. These desires correlate directly with the income earned and the expenses incurred on a daily basis. Consequently, the 50/30/20 rule serves to determine affordability in accordance with these varied life choices and financial circumstances.

3) For Emergency Fund

Acknowledging expenses and setting aside funds for unforeseen future events is crucial. Therefore, individuals must allocate a portion of their savings towards an emergency fund.

4) For Investment Purpose

It’s important to reserve a portion of your savings for investing in assets. The income you earn isn’t solely for immediate spending; it should also be set aside to enhance your standard of living over time.

What are the disadvantage of 50/30/20 Rule?