50/30/20 : The golden rule to save money
Whether it is a big buy—a new house, a fancy car, MBA abroad, a travel holiday, your child’s education, or an unforeseen financial/health crisis that may hit you, you can always bank on your savings. But, how do we fill our vessels if we do not know how to fix the hole at the bottom?
Saving money is easier said than done. It could be due to your low earnings that are just sufficient enough to cover expenses or the shopaholic mind that prevents you from accumulating those extra savings. The fact remains that in times marked by business or job uncertainties, saving your money becomes an absolute necessity. The sooner you learn, the better.
Irrespective of your level of earnings or expenditure, one must know how to strike just the right balance between earning, spending, and saving. The good news is that striking this balance does not remain too challenging if we know and apply the golden rule to manage our expenses—the rule of 50/30/20.
Coined by Elizabeth Warren, a U.S Senator and a Harvard law professor, the 50/30/20 rule is all that you need in order to live a life of financial peace, security, and prosperity.
What is 50/30/20 rule?
In order to get your finances right, you need to set spending limits. The easiest way to do this is by applying this simple formula to make your budget—50:30:20. Begin by dividing after-tax income into three categories and setting an upper limit to each one of them. The three categories are as follows:
- Wants and desires
Going by the thumb rule, 50 percent of your income goes to your needs/necessities, 30 percent to your wants, and 20 percent to your savings.
Of course, this would require you to do some work. Once you sit and ascertain the pattern of your current expenses and modify them for the upcoming month according to this formula, there will be minimal chances of your finances to ever get out of balance.
On the contrary, the further away you are from this balance, the more stressful your life is likely to be. Not today, but as years pass by. It is not to intimidate you or suggest that you live a calculated life without experiencing the pleasures of life for real. It is only to recommend that you live a pleasurable life that is not short-lived, but rather sustainable.
Let us understand in detail, these categories and how to accommodate our expenses accordingly.
Must-haves are essential needs that you have to pay for, regardless of any circumstance. This includes your rent (if the asset is not owned by you), utility bills for electricity, telephone, water, groceries, insurance payments, minimum payments of your house/car/education loan, school fee, medical expenses, etc.
This may vary depending on the size of your household, the number of dependants on you and the kind of existing obligations you may have. Your goal should be to not let your necessities exceed 50 percent of your income. If it is more than the 50 percent bar, then you either need to re-evaluate your priorities or chalk out a way to increase your income.
When you have allocated 30 percent of your earnings to your wants, you leave enough room for indulgence and recreation. Depending on your personal choice and preference, you can spend it on shopping, dining out, movies, a weekend getaway, or anything else that gives your soul happiness and enjoyment.
Do not neglect your wants. A little indulgence for passion and love is absolutely necessary to take life in its stride and fulfil basic obligations with energy and enthusiasm.
A month passes faster than one realizes. And this little chunk of 20 percent dedicated every single month to savings will become huge in no time. You could choose to put this money in your bank’s saving’s account, fixed deposits, or invest in mutual funds, bonds, and debentures.
You could also choose to make the extra payments of your debts, over and above the minimum monthly payments, so as to reduce the principal amount and interest.
Small it may seem, but remember that every single drop makes an ocean. You don’t have to worry even if you are making teeny-weeny contributions to our ocean. Over time, this is only going to add and multiply the numbers for you and come to your rescue.
It may take you a couple of months to execute this rule totally. But even with minor alterations, as long as you try to stick to it, be certain that you are moving in the right direction.
A balanced diet, with the right amount of protein, healthy fats, vitamins and minerals keep your body in great shape and also healthy from within. This golden rule does exactly the same to your finances!
So to live long and be financially secure, all you need is understand this formula and begin now.