50-30-20 rule of money – Easy financial planning for beginners
If you are in your early 20s and have recently landed your first job, you might be looking for some help with your finances. A new job, financial independence, and disposable cash are all exciting. However, inculcating healthy financial habits is essential too, if you would like to enjoy a sizable amount of money in your future. Though you may feel you are too young to worry about savings, there is no such thing as ‘too early,’ when it comes to investing.
Savings don’t have to come with compromises. For example, you could follow a simple ‘50-30-20’ rule of money, which helps you save and also leaves you with sufficient money to spend.
It was popularised by the United States senator Elizabeth Warren’s budget 50-30-20 rule. The 50-30-20 budget divides your money into ‘Needs’, ‘Wants’, and ‘Savings’. The 50-30-20 rule is an easy financial routine to follow, and thus, is especially beneficial for the uninitiated.
Needs are the necessities of life. For example, you need water when you are thirsty. Similarly, when you are hungry, you need to eat food. In the 50-30-20 planning context, we give 50% of our income to these necessities.
According to the 50-30-20 budget, you should spend 50% of your post-tax income on necessary expenses like car or home loan EMIs, rent, groceries, electricity and water bills, etc. If this is your first job, then perhaps it would make sense to avoid buying a car or a home for a few years.
Please note that movies, Netflix subscriptions, etc., do not count in the “needs” category. Under this heading, you should focus upon the bare necessities such as bills, medicines, insurance, etc. You should ideally be spending only up to half of your post-tax income on these indispensable choices.
Wants only after needs
Some expenses make our lives richer and more enjoyable. For example, buying an OTT subscription is a “want”. Similarly, spending money on a bigger, more luxe car when you already have a humble wheel also qualifies as a “want”. Going on a vacation abroad is also a good example of a “want”.
Wants can be defined as ‘upgrades.’ Anything extra to your existing need is a “want”. If you already have an internet connection but want a super-fast data plan, it qualifies for a “want”.
Per the budgeting 50-30-20 rule, you should be at the max spending 30% of your post-tax income on the “want” expenses.
Thus, you should be spending at most 80% of your income on your necessities and wants.
Rest is for savings
You should put all the rest of your income- at least 20% – in savings for the long term. Some of the savings instruments worth considering are the National Pension System, mutual funds, investments in gold, etc.
Life is unpredictable, and thus, you should have adequate cash at your disposal to handle financial problems, at least. The definition of ‘adequate’ varies from one person to another.
Importance of savings
As per a 2021 research conducted by Deloitte, millennials are, on average, saving merely 11% of their incomes. This could lead to inadequate savings in their future, leading to a stress-loaded, financially unhappy life.
Saving money according to the 50-30-20 rule of money helps you in various ways. For example, you can use your savings to cope with a financial crisis & help create an emergency fund. If you are a part of a comparatively young workforce, you could also use the savings portion (at least 20% as per the 50-30-20 rule) to upgrade your skills and move ahead in the value curve. With these spare funds, you could also help your parents in various ways. However, this amount is best invested for the long-term.
There are several financial advisory platforms to help you with your financial planning. Speak with such experts today and manage your money better. If that is taking time, just start with the 50-30-20 rule!