What is 50-30-20 rule?

The 50/30/20 Budgeting Rule—How It Works

50-30-20 is a simple budgeting rule to manage personal finance, popularized by Elizabeth Warren in her book "All Your Worth: The Ultimate Lifetime Money Plan".
Let's see a basic equation before moving on to the rule.

Savings ≠ Income - Expenditure
Expenditure = Income - Savings

Both equations are same in Maths but not in Finance. It's a very bad idea to first take out the funds for expenditure rather than savings.

50-30-20 rule asks us to divide our income after tax into 3 parts and allocate 50% for our needs, 30% for our wants and 20% for savings.
The savings portion can be increased based on our financial objective. But to be successful in managing our personal finance we must clearly define our needs and wants.

Needs: Things necessary for our survival or for our day to day life.
For e.g groceries, house rent, health care, Car maintenance etc. If your needs exceed 50% of our income, you need to downsize your lifestyle or shrink your wants.

Wants: Things that are not absolutely necessary but increases your utility/pleasure/comfort like Netflix, movies, shopping, Hobbies etc.

Savings: This is the most important section, savings can now be divided into further parts like investment, emergency funds, retirement plan, debt replacement, financial goal.
What if you lose your job or you have some health issues? You should have maintained at least 3 months of your income in an emergency fund. Invest the portion of your savings in stocks, mutual funds for growth. What if you want to purchase an apartment? You need to save for it every month, isn't it?
"It's not your salary that makes you rich, it's your spending habits." - Charles A. Jaffe.

Comments

Post a Comment

Popular posts from this blog

Colonialism and its impact on world economic order

Image
Have you ever wondered why African countries are still underdeveloped or developing. Most of the former colonies still lag behind in technological development and their economies are not yet mature. So, we'll try to understand the post-colonial world economic system from Marxist perspective. First will try to understand what is colonialism ? The policy of acquiring political control of a country and exploiting it in such a way that it completely alters the economic structure of that country and destroys its industries, manufacturing and trading sector and the country remains only the supplier of raw material with all other sectors disabled. How the sectors were destroyed is a topic of discussion for another article. Explaining briefly, the colonizers used to gain the political control of the colony, procure the raw materials from the territory and send it to their country to manufacture finished goods while barring the entry of all other European traders into their colony for tradi...
Read more

Money Multiplier

Money is primarily used to quantitatively measure the value of goods or services and supply of money plays an important role in the determination of inflation and interest rates. As the name suggests, money multiplier means ‘some’ supply of money creates a multiplier effect. Let’s see it in detail. Now let’s say there is a country called “Gokul Dham” and this country has infinite banks and infinite population but one central bank and the central bank has deposited Rs 100 in one bank named Bank#1. We know that all the deposits in the bank are the bank's liability since they are obliged to give it back to the depositors at some point in time and loans are the bank's asset. Let’s consider for the sake of understanding that the Cash Reserve Ratio is 10%. Cash Reserve ratio (CRR) is the proportion of money that banks are asked by the RBI to keep with themselves i.e they have to maintain some cash reserve with themselves and can’t loan all the money they have. Bank#1 can now loan Rs ...
Read more

Fiscal policy: Tool for economic stability and growth

In the realm of economics, fiscal policy plays a pivotal role in shaping a country's economic landscape. While monetary policy falls under the purview of the Reserve Bank of India (RBI), fiscal policy is primarily in the domain of Finance Ministry.  Fiscal policy deals with following activities: Revenue management Expenditure management Borrowing strategies All these activities are aimed at mobilizing resources, fostering growth, reducing inequality, and stabilizing the economy. In this article, we delve into the intricacies of fiscal policy.  The Union budget is prepared in two heads namely revenue account and capital account of the budget.  Revenue account contains revenue receipts and revenue expenditure while the capital account contains capital receipt and capital expenditure. Let's see what these accounts actually mean.  Revenue receipts : Revenue receipts are the day-to-day earnings of a government, and the source these income can be from taxation or from the ...
Read more