50-30-20 Rule is a popular rule in Financial Literacy. It basically means spending your monthly earnings in the following proportions:
- 50% on needs
- 30% on wants
- 20% on savings
The 50-30-20 rule is one of the simplest and the most effective answer to the question “How can I budget effectively?”. The rule not only helps in budgeting effectively but also helps in analyzing our own spending habits thereby contributing data to enact cost control measures thus enabling more lee-way in efficiently allocating funds or increasing our savings.
According to the rule, a major portion of the earnings is set aside for our needs such as rent, electricity, transportation, gas, food etc. Needs are those without which it becomes difficult to live, hence not much flexibility can be expected in controlling the expenses in this category.
Wants are those on which we choose to spend money on. A want is not extravagant—it’s a basic nicety that allows you to enjoy life. They rank below needs obviously because we could live without them should the need arise. They may include dining-out, movies, gym memberships, entertainment subscriptions etc. Always remember, If you’re confused about whether something is a need or a want, simply ask yourself, “Could I live without this?” If the answer is yes, that’s probably a want. This category is where we can be more flexible in allocating our earnings and thereby deciding on more savings or a comfier lifestyle.
Next comes our savings. Stashing away at least 20% of our earnings helps us in building a stable seed fund that can act as an emergency fund to tide over uncertain future crises or help in achieving long-term financial goals.
Of course, the 50-30-20 rule is not a set rule that one must follow. It is just a guideline meant to help us prioritize our spending patterns and manage our personal finances efficiently.
That's it for today folks and always remember, Financial ignorance is a sin.
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