Introduction to 50-30-20 budget ruleNo one like to work till the last breath of life! For a middle-class person, the hard earned money is a tool which helps him to sail through every difficulty. If you are a middle-class family person and till date, you have not done any financial planning, you should read this article completely.
One must set the budget that incorporates the essential needs, future savings, and personal expenses. The proportion is based on 50-30-20 budgeting rule. The 50-30-20 budget rule says we should break our salary or income into three parts. First 50 % should be allocated to essential things. 30% of total income should be kept for personal expenses and remaining 20% should be used for saving purpose to get a better return on retirement.
50 %-Essential needs:Out of total income or salary, one should set half the income to pay utility bills like electricity bills, water bills, gas bills, housing rent if any, EMI for the home loan or personal loan or education loan, health care items, grains, fruits, vegetables, insurance bills and every day items. When you are paying off loan EMIs, make sure it should not be more than 25% of your total salary. Try to avoid more loans to set the balanced budget.
30 %-Personal ExpensesPersonal expenses include the total expense borne by whole family members including children. One must set aside the fixed amount in order to control the unnecessary expenses which might spoil the whole month budget. The expenses included in this category are entertainment expenses, restaurant bills, travel and vehicle expenses and much more which do not fall into the regular bill payments. All these expenses should be real and worth spending. Do not show off otherwise this cost you a lot. Do not buy cars and other luxuries items which are not necessary as per the family needs.
20 %-Future goals or savings Everybody earns and spend but they one has to save the money for rainy days or tough times. Tough times may be illness or accident. One also has to keep aside money for a vacation in future, education costs for their growing children or retirement plans. These all goals can only be fulfilled if one saves money every month by keeping aside 20% of the salary. Do not worry about the inflation. It will remain with you forever. No one can ignore the future needs so why to worry about financial terms which are a little important to us.
ConclusionIt is said that 'Failing to plan is planning to fail'. Keeping this in mind, one has to set financial goals including budget setting as per the 50-30-20 rule. Always set 50 % of salary for essential needs, 30 % for personal expenses and last 20 % for future savings and financial goals of future. Stick to this rule and you will have the more amount of money in future. The habit of saving and investing money gives you wings in future.
It is true that one should have a good financial planning and keep some money reserved for the retired life. Otherwise one has to depend on the children for making the livelihood during the fag end days of the life. It is always better to reserve the 20% of the salary as savings and count the remaining salary only as your income for your present living. But in many cases there may be some emergencies during those times we may have to spend some reserves. That is why when we plan our expenses we should plan some for meeting the emergency requirements. Another important factor is to have a planning for health insurance and life insurance so that in case of any unexpected bad events also your family will never be on roads and they will have an undisturbed lifestyle. So in the planning of expenses, we should give due consideration to emergency expenses and insurance expenses also in addition to savings. Even the 20% what is marked for saving can be divided into three parts for emergencies, insurance and savings in a more realistic ratio.
If something is essential, then we have to satisfy that. There cannot be a percentage on that. The crux is how to fix what the essentials are. The main three basic ones are food, shelter and clothing. All other things come later only. So our first priority to spend will be on these three.
But here one should know the difference between the bare essentials and extras or indulgence. It may need a few months' trial and error experience to come to a stable level of essential expenses. The best way is to first save a small amount and then spend the balance. One should work out the amount by experience and willpower.
This 50:30:20 rule is a well-known home budget planning formula that comes from Elizabeth Warren, a former US senator, who wrote the book on 'All Your Worth: The ultimate lifetime money plan'. A simple rule of spending our earnings and saving a little at the same time. It would be fair only if we acknowledge her in this article.
When it comes to savings, the 20% need not be fixed, it can be less or more. Some people think small amounts do not make much of a difference but if you save whatever you can and then look back, it would be a decent sum of money. One often would need expert advice when it comes to long term planning of how best to improve the families savings, keeping in mind the expenses and future needs ( education, marriage etc).
When it comes to 50% of our earnings for essential needs, it is important to include all the mandatory expenses, the biggest being our home EMIs and other loans. Please remember that TV, cable, mobile bills etc are not to be included in this.
In the 30% personal expenses, one should try and cut it down. For instance, a car becomes a personal item but having two big vehicles in one family eats into the budget. Eating out and takeaways are enjoyable by many families but it should not become a regular affair for the middle-class families with mounting essential expenses.