Ever heard of a millionaire who achieved his goals without a budget or a Fortune 500 company who does not have a budget? There aren’t any.
Successful people or businesses around the world have one thing in common – they budget their money. And they do it because it works.
In reality, a budget may help you keep track of your spending and avoid late payments, as well as assist you reach your real-world goals. It helps you optimize your bigger financial goals. That can include tracking this month’s groceries, a trip to Costa Rica or it can mean paying off all your debts by the end of the year.
To arrange your money and form a BUDGET, use this easy 50/30/20 formula.
The 50/30/20 rule is a simple and effective monthly budgeting approach that advises you about how much money to be allotted toward savings and living expenses each month. You can avoid overspending and build up your savings with a clear big-picture snapshot of your monthly budget, without meticulously logging every single transaction.
50% to “needs” 30% to “wants” 20% to “savings”
The 50/30/20 rule was conceptualized by Sen. Elizabeth Warren, a Harvard law professor and her daughter Amelia Warren Tyagi. They popularised the 50/30/20 rule in their book “All Your Worth: The Ultimate Lifetime Money Plan
How to Budget Using the 50/30/20 Rule of Thumb
Most individuals save too little and spend too much without realizing it. The 50/30/20 rule of thumb is a simple method to become more mindful of your spending and saving patterns. It will be easier to stick to your budget and keep your spending under control if you know exactly how much to spend on each category.
Spend 50% of your money on needs
Necessary costs are those that cannot be avoided, such as your household budget, your child’s school and tuition fees, loan EMIs, and so on. These required and significant expenses will consume 50% of one’s income. Weekend hangouts, watching movies with family, dining out, and so on are important but not necessary costs.
For instance, if your monthly after-tax income is Rs.80,000 on-hand, Rs. 40,000 should be set aside for your necessities. While this budget may vary from person to person, if your spending on requirements exceeds 50% of your take-home income, it is recommended that you make some changes that will lead to a healthier financial life.
Use 30% of your money on wants
You can spend up to 30% of your after-tax income on your wants. Non-essential costs are described as items on which you choose to spend your money despite the fact that you could live without them if you had to. Dining out, shopping, vacations, gym memberships, and entertainment are just a few examples.
Using the same example as before, if your monthly after-tax income on-hand is Rs. 80,000, you have Rs. 24,000 to spend on your desires. If you find that you’re overspending on your wants, consider which ones you can cut on.
Set away 20% of your earnings for savings.
The remaining 20% can be used to achieve your savings objectives or to pay off any existing obligations. Putting aside 20% of your earnings on a monthly basis can help you establish a sensible savings plan for an emergency fund, a long-term personal financial strategy, or a lavish lifestyle in the future. If you earn Rs. 80,000 after tax each month on-hand, you could put Rs. 16,000 towards your savings goals.
|In just a year, you’ll have saved close to Rs. 1,92,000 !|
The 50/30/20 budget guideline is merely one piece of the jigsaw when it comes to budgeting. It’s great to aim for these percentages, but you’ll never know whether you’re succeeding until you track your spending. In case of any assistance needed to budget your finances, contact your financial advisor and gain the most insightful solutions in order to meet your goals.