Becoming wealthy is a matter of good money management.
My salary dries up before the end of the month is a statement we hear very often.
It happens due to multiple reasons like lifestyle inflation, expenses racing ahead of income, and also uncontrolled (or untracked) spending habits. It constrains us from saving up for our future as well.
Our spending habits affect our future spending capacity. There is a practical rule that helps people channel what they earn to balance both their current and future spending capacity. The name of the rule is the ‘50/30/20 budget rule’.
1. Realistic monthly budget
Elizabeth Warren (US Senator from Massachusetts since 2013) stated this rule in her book
All Your Worth: The Ultimate Lifetime Money Plan.
It serves as a benchmark for most people by providing a well-defined optimum mix of needs, wants, and savings.
A rule is a powerful tool for emergency money management, achieving long-term goals, and retirement planning.
According to the ‘50/30/20’ split, every monthly income (post-tax) must be divided into three categories of spending: Needs, wants, and savings.
What exactly is the 50/30/20 rule?
Needs, wants, and savings can be broken down into fragments as follows:
NEEDS: 50% of income – This category consists of expenditures on the basic requirements of daily life, for example, food, school fees (considering that the person is a parent), utility bills such as grocery and electricity, life and health insurance premiums, and debt payments too.
WANTS: 30% of income – These include facets of life that are not important for dear life but serve as amusement. Some good examples are purchasing items in the shopping cart like mobile phones, non-essential clothing, etc.
Also, the OTT subscriptions that people buy belong to this category. Dining is an essential part of this category of expenses.
SAVINGS: 20% of income – This component of the 50/30/20 rule tells us to put aside some money into return-generating assets like stocks, bonds, ETFs, and more.
Assume we figure out how to produce a sound return (an abstract figure) over an extensive stretch with a steady increase in contribution (with an expansion in pay) to this category.
All things considered, we will then be sitting on a decent corpus of wealth 20-30 years down the line, given the power of compounding. The savings component also allows us to plan for particular future expenses like children’s higher education and retirement.
Begin investment money management Strategy
However, it’s worth noting that the 50/30/20 split might be altered for a different ratio, based on a person’s stage of life.
For example, a student earning Rs. 25000, is bound to have a break which is highly skewed towards the savings component of the rule, whereas an adult earning Rs. 25000, might not devote a very high percentage of income to savings because of the expenses to be borne.
One thing might go unnoticed – the fact that the ‘needs’ part of expenditure will saturate at some point, which then allows for higher spending toward the other two categories.
The rule does not seem to work for people with very high and very low income levels. The former group faces the crunch to accommodate even the necessities, and the very high-income people have the liberty not to divide their income into stringent ratios.
Why money management is important?
Following this rule will help people empower themselves to deploy their due diligence in money matters.
Once people gain insight into their monetary inflows and outflows, they will be able to exercise better command over the way they spend their salary, and thus, consequently, become mindful of their spending habits and balance all facets and take maximum benefit from this.
The most essential grasp of the rule is not the exact proportion as stated earlier, but the framework that the rule provides. The category split is subjective in nature, depending on the size of the income and the age of the individual.
FAQs
What is the 50/30/20 rule?
Ans. You are required to divide your in-hand money into three equal portions. 30% of income is spent on wants, 50% on needs, and 20% is set aside for savings and investments.
By doing this, you will have established buckets for everything and be operating inside each bucket’s allowable limits.
What are the 3 most important rules of money?
Ans. The first and most important rule is to save a set amount of money—no less than 10% of your income—before you do anything else with it.
Keep this number as high as you can, I assure you. 90% of my wages are saved (my parents support my living expenses). Start at 20% and monitor your progress over the next three months. The remaining money may be spent, but exercise caution as to how, when, and where you do it.
Keep a record of your spending, both total and by item. You’ll be able to make wiser financial decisions as a result of this.
You can begin creating a monthly budget that specifies how much you can spend on each item once you have a handle on your spending. Create a thorough budget using the data gathered from the tracking app. All expenses, including those for food, rent, bills, and travel, should be included in the budget. Once one has been established, follow it.
What are the 5 simple steps to save money?
Ans. 1. Set one distinct objective.
2. Plan for savings.
3. Set up automatic saving.
4. Maintain distinct accounts.
5. Invest
What’s the golden rule of money?
Ans. Don’t spend more than you make is the basic rule; instead, concentrate on what you can keep. Although it might seem apparent, you’d be astonished at how many people don’t comprehend or adhere to this rule, which leads to debt. Take credit card usage as an illustration.
