The key to living a financially secure life is not about how much money you earn, but how well you manage your money, regardless of whether it is spent or invested in online stock investing. The first step to managing money wisely is to prepare a budget.
Simply put, a budget is the cornerstone of financial planning. It is prepared for a specific time period based on a plan for saving, investing, and spending. You’d normally prepare a budget purely based on the income you earn.
For many, a salary is the primary source of their income. Even after creating a budget, if you are feeling confused about how to start, we are here to help you understand the 50-30-20 budget rule. It will help you split your expenses, save money, and invest online in a manner that’s realistic and achievable.
Why Choose the 50-30-20 Technique?
The 50-30-20 rule is a budgeting technique where money is allocated based on 3 categories:
Needs are anything that’s necessary, rent being the best example. Wants are things that you want to splurge on, typically a dinner or lunch date. Investing is allocating your money to various assets so that it can gain more returns for you.
If you want to understand how share investing works, read this blog: Top 7 Best Books to Read For the Stock Market
Fun fact: The 50-20-30 budgeting rule was first used by US Senator Elizabeth Warren.
This budgeting technique can help people like you devise a solid plan for spending or saving money for future or unforeseen circumstances, as well as bills and expenses that are recurring and necessary.
However, it is also commonly used to make sure that budgeting is easy to follow. Here’s how you can create a 50-30-20 budget rule for yourself.
1. 50%: Needs
The first step is to allocate 50% of your income to your needs. Needs are those essential expenses necessary for survival. Rent, electricity bill, water bill, and other similar expenses fall under the category of needs.
Since it is 50%, it also means that half of the income earned must help meet any sort of obligation. Your essential expenses are those that have to be paid, regardless of your future, plans, job, or earnings.
There may be a situation when more than 50% of the income may go to needs. In such a case, there may be a requirement to cut off some expenses from the wants section. Sometimes even downsizing the lifestyle can be an alternative.
That said, you could allocate 50% of your income to savings in case you have little to no liabilities. As you’ll notice, the 50-30-20 budget rule is quite fluid and can be used based on your goals.
2. 30%: Wants
You have the liberty to spend 30% of your income on wants. Wants are those expenses that are not absolutely essential but are necessary for maintaining balance in life.
As a type of expense, wants are not mandatory as it does not create any sort of obligation to be paid.
There may be a time when people may want to prefer something more than their regular lifestyle or habits.
In such a case, such expenses come under the wants category. Examples include changing from a regular restaurant to a more expensive one.
3. 20%: Savings
You need to save money to survive amidst the changing economic environment. Right from changes in market conditions to inflation and economic slowdowns, such times are quite unpredictable.
By the way, we’ve got a blog on saving that you might like: Debunked: 10 Biggest Myths about Saving and Investing
This also means that the chances of meeting any urgent or unforeseen expenses are usually high. Only by having a part of income allocated to savings, the chances of surviving these changes are high. Thus, you must save 20% of your income as per the 50-30-20 budget rule to survive tough times.
Savings is not negotiable, and just like needs, this is also a mandatory commitment. Allocating 20% of income towards savings and online stock investing will help meet any financial commitments in the future. You could also explore new avenues like swing trading.
How To Use the 50-30-20 Budget Rule?
The 50-30-20 budget rule comes in handy to be disciplined in your savings and wants to change the way you spend your money. By simply spending less on things that are not a priority and keeping a check on saving, it becomes easy to follow this rule.
Individuals with a steady salary can look at their paychecks to see how much they are earning each month. At the end of each month, taking a look at the bank statement or using tracking apps can help you know where and how the money is being spent.
Eventually, you will be able to categorize what are the expenses that fall in the 50/30/20 category. It will also help you assess what habits you can develop to keep a check on your expenses and inch closer to your financial goals.
It is important to note that the 50-30-20 budget rule is not hard and fast. It is just a technique to help you understand where your money is being spent.
Following such a budgeting technique helps create financial discipline. This helps you prioritize those expenses that are absolutely necessary.
Simply put, by simply tracking your expenses and knowing when, where, and how much to spend, you can inch closer to your financial goals.
You can stabilize your earnings and expenses, post which, there is a higher chance of being more mindful of spending and saving habits.
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