Improve your finances with these simple 50/30/20 Money Management rule
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’.
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 an 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.
Let's begin our money-management journey with these small measures today.