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What is the 50/30/20 Rule?

Facing a financial crunch in the middle of the month can be frustrating, regardless of income. When salary disappears before the month is halfway through and credit cards become necessary to cover expenses, it’s a common issue. Fortunately, the 50/30/20 Rule offers a solution to regain control over finances. This budgeting method is straightforward and easy to apply. ...Read More

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50 30 20 Rule

Understanding the 50/30/20 Rule

What is 50 30 20 Rule
September 02, 2024

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50-30-20 budget rule explained

The 50-30-20 Rule tells you to break down your in-hand income into three buckets. The first one would have 50% of the income, which goes towards needs; the second bucket would have 30% of your income, which goes towards wants, and the rest 20% of income would go towards the third bucket of savings as well as investing. Now that the 50-30-20 Rule is clear, let us deep dive to understand each bucket's needs, wants, and savings.

50%: Needs

We all have needs, don’t we? Simply put, needs are the things that we absolutely require for survival. Needs include clothes, groceries, electricity bills, house rent, insurance premiums, EMI repayments, etc. Consider allocating a small percentage of your income towards life insurance premiums, to ensure your family's financial well-being is protected.

As per this Rule, exactly half of your post-tax income should ideally be used to take care of needs. Keep in mind that luxuries such as gym membership, Netflix subscription, etc., can not be included as necessities. Also, if you end up spending more than 50% of your income on just wants, you would then have to trim down on the list of wants. If even that is not possible, then the only option left is to lower your standard of living and live with the minimum basics that you need to survive. A minimalistic lifestyle would help you stay limited within the 50% rule for needs and ultimately help in also maintaining 30% for wants and 20% for savings and investments.

30%: Wants

Once you are able to limit your needs to 50% of your post tax income, you would then need to sort out your wants. 'Wants' are a level above needs. They are not needed for survival but are something you would aspire to have, such as dinner and movie outings, vacations, hobby classes, etc. In the 50 30 20 rule, wants are often the trickiest part to handle, as wants are endless, especially in today’s modern era where most people are following the ‘YOLO’ motto, i.e. you only live once.

To limit your list of wants, you can adopt multiple ways. The first way is to not spend on anything that is not worth the money, and do not surrender under peer pressure. Only buy something when you are convinced that it is not an unnecessary purchase and that you have compared the prices on multiple stores and websites before finalizing it. As far as peer pressure is concerned, just because a friend of yours is buying a luxury car does not mean you require it too, right? Do not surrender under peer pressure to buy anything which you actually do not require, either as a need or a want.

The second way to tackle wants is to avoid impulsive purchases and space out your purchases. For example, if you want to buy that new iPhone, do not just go and buy it impulsively. Instead, begin building a shopping fund' in which you start saving a small amount of money gradually to buy that product instead of going for EMIs. So, ultimately, all it takes is proper planning and discipline to contain your 'wants' list and thus maintain the 50-30-20 Rule for your financial well being.

20%: Savings & Investment

The last concept of the 50-30-20 Rule is the savings and investment plan part. Once you have sorted the needs and wants buckets, you need to think about your future planning. This 20% bucket would help you accumulate a significant corpus that would take care of your future financial goals.

Under this bucket, 20% of your after-tax income should be saved as well as invested in different asset classes such as equity, cash, gold, real estate, etc. But, unlike the needs and wants buckets, savings and investments should be considered non-negotiable, and as a priority. Even if it means that you need to postpone your luxury trip or hop onto a train instead of a flight, do it. That trip or some other big expenditure can perhaps wait, but not your savings. The earlier you begin to save & invest, the more time you allow your money to grow.

Integrating Life Insurance into the 50/30/20 Rule:

When allocating your income towards your needs i.e the 50% bucket, consider setting aside a portion for life insurance premiums. This can be a small percentage of your overall savings, but it can provide significant benefits in the long run. For example, you could allocate 5% of your income towards life insurance premiums, leaving 15% for other savings and investments.

By incorporating life insurance into the 50/30/20 rule, you can create a more comprehensive financial plan that addresses not only your short-term needs and wants but also your long-term goals and responsibilities.

Why Life Insurance Matters:

Life insurance can help ensure that your family's financial well-being is protected, even if you're no longer around. It can help pay off outstanding debts, cover funeral expenses, and provide a financial cushion for your dependents. By incorporating life insurance into your overall financial plan, you can have peace of mind knowing that your loved ones are protected.

How to use the 50/30/20 Rule?

The 50/30/20 Rule is not difficult to implement. All you need to do is assess your financial requirements and lifestyle and allocate a particular budget for needs, wants, and savings. Still confused? Read on as we explain all the steps required to use the 50 30 20 rule.

1. Calculate Income

Firstly, you need to calculate your monthly inflow of income and post taxes. Your in-hand income every month is what you would ultimately need to bifurcate into the three buckets—needs, wants, and savings. If you do not know your income, you will not be able to implement the 50/30/20 Rule. Check your bank statements if you are unsure of your monthly income inflow.

2. Categorize Spending

Once you are aware of your monthly income, you should review your expenses and then categorize your spending. Make a list of all your needs, wants, as well as savings from the previous months. This step will assist you to understand your spending patterns and then accordingly plan on how to contain the expenses within the 50% and 30% buckets and save the remaining 20% for investments.

3. Set Spending Limits

Now that you are aware of both your monthly income and categorized expenses, you must calculate how much to spend on each category. For example, if you earn Rs 1,00,000 per month, you should allocate Rs 50,000 towards your needs, Rs 30,000 towards your wants, and Rs 20,000 towards your savings and investments every month.

4. Adjust to 50/30/20 Rule

After understanding how much you need to put into the three buckets to adhere to the 50/30/20 Rule, the next step is to compare your current allocation with the required allocation for the Rule. In case you are not balancing the three buckets, you need to assess where you are spending more and then adjust that to fit into the Rule. Taking the above mentioned example again, in case you are allocating Rs 30,000 towards your needs and only Rs 10,000 towards your savings, you need to realign your spending and budget as per the 50/30/20 Rule.

5. Plan Your Budget

Now that you have calculated everything and adjusted your spending as per the 50/30/20 Rule, you must plan your future budgeting. Be disciplined and stay within the 50%, 30% and 20% allocations every month. And in case you are unable to do that in any particular month, try to adjust the expenses next month to make up for the lapse. This will ensure you remain on track with your savings and investments too.

Benefits of the 50/30/20 Budget Rule

Simple to Use

The 50/30/20 budget rule offers you a simple and straightforward framework to distribute your income into the three buckets without any complex calculations or jargon.

Promotes Savings

Having a fixed budget every month to allocate for needs and wants, you can naturally ensure savings, as that 20% remaining income would specifically be left for this purpose. That is how the 50/30/20 Rule ensures you keep saving (like in savings schemes) and investing every month and thus secure your financial future.

Provides a Safety Net

By incorporating life insurance into your 50% needs bucket, you can provide a safety net for your loved ones in case of an unexpected event. This can help ensure that your family's financial well-being is protected, even if you're no longer around.

Balances Spending

Following the 50/30/20 Rule also aids you limit your monthly spending and balance the spending and saving aspects as per the required 50%, 30%, and 20% proportions. This way, you know when and how you need to balance and realign which bucket out of three so that the Rule continues to be followed.

Improves Financial Awareness

Besides the 50% for needs and 30% for wants, the 50 30 20 rule ensures you allocate 20% for savings and investment, which would not only include bank FDs or mutual fund investments but also the aspects such as emergency fund and retirement planning, which would only be possible when you are financially aware about such aspects. Given that you have to save 20% of your income for saving every month under this Rule, you would gradually become financially aware of how and where to put your money to secure your future.

Reduces Financial Stress

The 20% saving aspect of the 50/30/20 Rule ensures you keep saving something for your future, right? This ultimately helps you accumulate a significant corpus through saving and investment, which thus helps in reducing financial stress for the future, both short as well as long term.

Conclusion

Once you understand the 50/30/20 Rule and begin to implement it in your monthly budget, you can not only manage your lifestyle without much hustle but also keep securing your financial future through savings. Moreover, if your needs and wants can take a lesser proportion than the 50% and 30% rule, you can follow that as well, as long as your savings are increasing upon trimming down your expenses in the form of needs and wants. Keep in mind that the primary aim behind this Rule is to ensure you stick to a budget every month without compromising on your savings.

FAQs on 50 30 20 rule

Q. How does the 50/30/20 Rule work?

The 50-30-20 Rule tells you to break down your income into three buckets. 50% of your total income goes towards your needs, 30% towards your wants, and 20% towards your savings and investments. The primary aim behind this Rule is to ensure you stick to a monthly budget for your expenses and never compromise on your savings for the future.

Q. What is the 50 30 20 rule of money in India?

The 50 30 20 rule assists you manage your monthly budget and, at the same time, keep securing your financial future through savings as well as investments. The Rule requires you to bifurcate your income into three buckets by setting aside 50% for needs, 30% for wants, & 20% for savings.

Q. Can I Use the 50/30/20 Rule to Save for Long-Term Goals?

Yes. As the 50/30/20 Rule involves the 20% saving and investment aspect, you can accumulate wealth towards long term financial goals such as home loan down payment or retirement corpus by saving & investing 20% of your income every month under the Rule.

Q. Can the 50/30/20 Rule be adjusted for different income levels?

Yes, certainly. As your income can keep changing across different time periods, such as every year, you can adjust your expenses and savings accordingly so that the 50%, 30%, and 20% proportions remain maintained every month. In fact, as your income rises, you can try to keep your expenses as it is and increase your savings with the help of the boosted income.

Q. How can I track my progress using the 50/30/20 Rule?

Every month, you can track your progress by checking if you are sticking to the 50%,30%, and 20% proportion for needs, wants, and savings, respectively. Gradually, as months and years pass by, you will see how you have been able to consistently save money every month in a disciplined manner, which would reflect in the corpus you would have built, besides controlling your expenses (needs and wants) throughout every time period.

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Francis Rodrigues Francis Rodrigues

Francis Rodrigues has a decade long experience in the insurance sector, and as SVP, E-Commerce and Digital Marketing, HDFC Life, manages the online sales channel, as well as digital and performance marketing. He has had hands-on experience in setting up sales channels and functional teams from scratch over a career spanning 2 decades.

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Vishal Subharwal heads the Strategy, Marketing, E-Commerce, Digital Business & Sustainability initiatives at HDFC Life. He is responsible for crafting and ensuring successful implementation of the overall organisation strategy.

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