Sandra is a superwoman. She can’t fly or she can’t singlehandedly save a bus from falling off a cliff, but she can budget and she does it pretty well. She was quite happy with the way she was handling her finances until she saw her younger brother struggling to save money. After a lot of thought, she decided to unravel her superpower to her brother and it turned out to be a simple 50-30-20 rule. Let’s join Sandra as she explains the same to her brother and helps him start saving. 

What is the 50-30-20 rule?

The 50-30-20 budget rule is a technique of budgeting where you divide your total income after taxes to make sure you have an amount of money to save or invest at the end or beginning of each month. Budgeting is often a complex topic for many and a number of people are averse to the math associated with it. But what Sandra did here with the 50-30-20 budget rule is simple, she divided her income into three parts, each having 50%, 30%, and 20% of her total income respectively. Below is how the division works in this rule.

·         Your needs need half of your income

In the 50-30-20 rule of budgeting, a bigger share goes for your needs. This may include your day to day living expenses, including food, and your monthly bills. Most often, even in the needs section, you might have leaks where you spend more money than actually required. For example, you could reduce the electricity bill by turning off electrical equipment when not in use. The fact is that most people won’t recognise the magnitude of such leaks until they budget. Hence, by using the 50-30-20 rule of budgeting, you can find these leaks and work towards plugging them.

·         Your wants deserve 30%

Your necessities are followed by your wants. These are the things that can be avoided but are what you want like new clothes, holidays, etc. It deserves 30% of your budget because these are often necessary for you to keep the quality of your lives up. Here too, the 50-30-20 rule of budgeting will help you analyse and find if you are spending too much on your wants and act accordingly. 

·         The smaller pie is for your savings

20% of your income should go towards saving or investing, according to the 50-30-20 rule of budgeting. The thing here is that as your income grows, the money you save will also increase, enabling you to accumulate a good amount of wealth over time. At the same time, if you have debts or loans, you could use a part of the money towards repaying them as well. 

Budgeting is necessary 

The 50-30-20 rule of money might work for quite a few people but it is a template and your aspirations and objectives might not always fit into that. What helps here is analysing your individual situation and making a budget, because a budget for yourself is nothing short of a necessity. 50-30-20 rule or not, get your notepad and calculator and start your budgeting if you haven’t already! Alternatively, you can also reach out to a financial expert to help you out with your saving and investing needs.

Visit Kotak Cherry to eplore our all in one investment platform for all investment products.