Despite having an adequate income, we often find ourselves short on funds in the middle of the month. During such a time, we cannot do anything but wonder where our hard-earned money went. Such a problem is common among people aged between 25 to 35 years. This is because the young generation likes to live to the fullest and does not think twice before indulging in a night of partying or having the best of fashion, technology, etc.
Though this is not an entirely bad thing, because a young age when you have little responsibility is the best time to enjoy life, one needs to be cautious. Because you can quickly find yourself in a financial spot if your expenses overshoot your income, and you end up living your life on credit and paying heavy interest.
For those who cannot categorise their income effectively, an excellent budgeting rule, known as the 50/30/20 Rule, has been put forth by Senator Elizabeth Warren in her book ‘All Your Worth: Ultimate Lifetime Money Plan.’ The 50/30/20 Rule effectively divides your after-tax income into different categories so that you can discipline your expenses and make your finances sounder.
Let us look at the 50/30/20 Rule in detail.
What is the 50/30/20 Rule?
The basic tenet of the 50/30/20 savings plan is categorization. First, you take your total income and deduct applicable income tax from it so that you get your actual usable income. Now, you divide your after-tax income into three parts. The first part should be 50% of the total income, and it should go towards fulfilling your needs. Similarly, 30% should go towards your wants, and the remaining 20% should be saved and invested.
Such a disciplined approach to using your income ensures that you save a part of your income regularly without compromising on your standard of living because a healthy chunk of your income is still going into your daily expenses.
Needs, Wants, and Savings
Needs: 50%
Now the question arises, what constitutes a need? Anything that you absolutely require for your survival are needs. They’re basic necessities like house rent, electricity bill, gas bill, groceries, health insurance premiums, etc. These are absolute necessities you cannot live without; hence, 50% of your income must be used.
Wants: 30%
A healthy 30% of your income can be easily allotted to fulfil your wants. Your wants are things that you do not require for survival but are simply indulgences that you enjoy. The expensive weekend dinner, your premium TV subscription, branded clothes, getaways, etc. You can do without these, but you should splurge on them for your happiness. Allot 30% for such expenses, and you can easily keep enjoying your wants while at the same time not going overboard.
Savings: 20%
The remaining 20% of your income must be saved and invested. This is probably the most critical part of the 50/30/20 Rule. Investments can help you accumulate wealth over the long term. Even such a small percentage of investment, when regularised for the long term, can turn into a sizable corpus due to the power of compounding.
Read more to know about How to make an Investment Plan?
In this way, you can use the highly effective 50/30/20 Rule in your savings plan to check your expenses, have a good balance between your needs and wants, and initiate a disciplined investment habit.
Visit here to know more about Savings Plan: https://www.kotaklife.com/online-plans/savings-plan
