As an individual, it becomes essential to understand your money management pattern.
In this busy life, most individuals don’t even pay attention to how their money is managed and often tend to overspend. But another category of people is mindful about sending and are savers.
The money management pattern is typically divided into two categories — Spender and Saver. However, there is a third category called INVESTOR.
Spender is the one who spends first, and if something is left, they think about saving.
Saver is the one who saves first, and whatever is left, they spend.
Investor thinks about savings along with growth.
The money management formula helps you understand your money pattern and which category you fall into.
Table of Contents
Which Category Do You Fall Into – Spender or Saver?
Recognize your money management pattern today and start working towards it.
If you are a Spender, then work towards becoming a Saver; if you are a Saver, then work towards Investor; and if you are an INVESTOR, it’s time to become a WISE INVESTOR!
INVESTOR → Your next step is to move towards goal-based investing 🙂
Let’s learn the 50/30/20 Rule of Budgeting for you to save efficiently.
Rule of thumb: 50/30/20 Rule of Budgeting
The 50/30/20 rule of budgeting is a guideline to help individuals manage their finances effectively. The 50/30/20 budgeting rule allocates your income into three categories: needs, wants, and savings. Here’s a breakdown of each Category:
➡️50% Towards Needs
This portion of your budget should cover essential expenses or needs—things you must pay to maintain a basic standard of living; this includes rent or loans, utilities, groceries, transportation, insurance, and minimum debt payments.
- Groceries Rent
- Utilities like electricity bills, water bills, etc.
- Children education expenses
- Insurance expenses
- House or car EMIs
Ensuring that no more than half of your income is dedicated to these necessities (items 1 – 4) helps create a stable foundation for your financial well-being. Combining all the debts, the EMI should not exceed 35% of your take-home income.
➡️30% Towards Wants
The wants category includes lifestyle expenses like dining out, entertainment, hobbies, and other lifestyle choices that enhance your quality of life but are not strictly necessary for survival. Keeping this portion at 30% allows for flexibility and enjoyment in your budget without jeopardizing your financial stability. However, if you want to enjoy your life today and plan well for tomorrow’s responsibilities, you must limit it to not more than 20%. You can refer to the age-wise table below for better budgeting.
➡️20% Towards Savings
The remaining 20% is allocated toward savings; this includes contributions to goal-based investing like emergency fund creation, saving for house purchase down payment, car purchase, own marriage child education, retirement planning, and paying off high-interest debt (if any). Building a savings cushion and reducing debt are crucial steps toward achieving long-term financial goals and ensuring financial security.
| IDEAL BENCHMARK | ||||
| Particulars | Age Range | |||
| Upto 35 | 36-44 Years | 45 Years & Above | ||
| Regular Expense (Need)* | 50% | 50% | 40% | |
| Lifestyle Expenses (Wants) | 30% | 20% | 20% | |
| Savings | 20% | 30% | 40% | |
*Regular Expenses Include Loan EMI (Specifically Home Loan EMI), and if you do not have a loan, then your ideal regular expense should be 20% less than mentioned in the above table; savings must be 20% more than mentioned in the above table.
Following the 50/30/20 rule provides a simple framework for financial planning, promoting a balanced approach that addresses immediate needs and future financial objectives. However, it’s important to note that individual circumstances vary, and this rule may need to be adjusted based on specific financial goals, lifestyle choices, and local cost-of-living considerations. Regularly reviewing and adapting your budget to changes in income or expenses is key to maintaining financial health.
Benefits of the 50/30/20 Rule?
The 50/30/20 rule offers several benefits that contribute to effective financial management and overall financial well-being:
- Simplicity and Clarity:
- The rule provides an easy to understand framework for budgeting. Its helps individuals (even with limited financial knowledge) create a clear and manageable plan.
- Balanced Financial Priorities:
- By dividing income into three distinct categories—needs, wants, and savings —the rule encourages a balanced approach to financial priorities. It ensures that essential living expenses are met while allowing savings towards your goals so that you live comfortably today and plan responsibilities for tomorrow.
- Financial Stability:
- Allocating 50% of income to essential needs helps establish a stable financial foundation; this ensures that critical expenses such as housing, utilities, and groceries are consistently covered, reducing the risk of financial instability.
- Flexibility and Lifestyle Enjoyment:
- The 30% allocated to discretionary wants provides flexibility for individuals to enjoy non-essential expenditures. This flexibility allows for lifestyle choices that enhance personal satisfaction and well-being without compromising financial stability.
- Savings and Debt Reduction:
- The 20% earmarked for savings and debt repayment facilitates the building of an emergency fund, contributes to retirement savings, and accelerates the repayment of high-interest debt. This focus on savings and debt reduction promotes long-term financial security and freedom.
- Goal Setting and Financial Discipline:
- The rule encourages individuals to set specific financial goals for savings, debt reduction, or other objectives. This goal-oriented approach boosts financial discipline and motivates individuals to stay committed to their financial plans.
- Adaptability to Income Changes:
- The 50/30/20 rule is felxible to changes in income. Whether experiencing an increase or decrease in earnings, individuals can easily adjust the percentages to accommodate their current financial situation while maintaining a balanced budget.
- Automated Financial Management:
- Automating savings contributions streamlines financial management. Automation ensures that individuals consistently allocate the intended 20% to savings and debt reduction without needing constant manual adjustments.
- Financial Awareness and Accountability:
- Following the rule promotes financial awareness by requiring individuals to assess and allocate their income actively. This increased awareness fosters accountability, helping individuals make informed financial decisions aligned with their goals.
- Reduced Stress and Improved Financial Well-Being:
- By providing a structured and balanced approach to budgeting, the 50/30/20 rule can help reduce financial stress and improve overall financial well-being. It empowers individuals to take control of their finances and make intentional choices that align with their values and objectives.
While the 50/30/20 rule offers a solid foundation for budgeting, it’s essential to recognize that individual circumstances vary. Tailoring the rule to specific needs and regularly reviewing and adjusting the budget ensures its effectiveness in different financial situations.
4 Steps Money Management Formula: Step-By-Step Guide
Applying the 50/30/20 rule to your budget involves a step-by-step process to ensure that your income is allocated appropriately to cover your essential needs, discretionary wants, and savings/debt repayment. Here’s a guide on how to implement the 50/30/20 rule:
- Find Out Post Tax Your Monthly Income: Calculate your total monthly post-tax income; this includes your salary income, freelance/ consulting/business income, rental income, Capital gain, and any other sources of income.
- ✓For Salaried Individuals: Calculating post-tax salary income may not be a worry as employers take care of it. If you have any other sources of income, then pay the advance tax to avoid the penalty.
- ✓For Professionals or Self-Employed Individuals: Use your net income (after taxes) for accurate budgeting.
- Identify your expenses in the defined Category:
- (a) Identify and List Essential Needs (50%)
- List all your essential monthly expenses, including:
- 🔹Rent or mortgage
- 🔹Utilities (electricity, water, gas)
- 🔹Groceries
- 🔹Transportation (car payments, fuel, public transit)
- 🔹Insurance (health, auto, renters)
- 🔹Minimum debt payments
- Ensure that your essential needs do not exceed 50% of your monthly income. If it does, consider adjusting, such as finding ways to reduce utility costs, exploring housing alternatives, re-evaluating travel expenses, etc.
- (b) Identify Lifestyle Expenses / Wants (30%)
- List all Lifestyle Expenses / Wants, including
- 🔸Dining out
- 🔸Entertainment (movies, concerts, subscriptions)
- 🔸Hobbies and leisure activities
- 🔸Non-essential shopping
- Ensure that your discretionary wants do not exceed 30% (preferably 20%) of your monthly income. If it does, consider prioritizing or cutting back on certain discretionary expenses to bring them within the allocated percentage.
- (c) Allocate 20% to Savings and Debt Repayment:
- The remaining 20% of your income should be allocated to savings and debt repayment; this includes:
- ✓Emergency savings
- ✓Retirement contributions
- ✓Paying down high-interest debt
- (a) Identify and List Essential Needs (50%)
- Automate Savings: Set up automatic transfers to your savings accounts and automate debt payments to ensure that you consistently allocate the intended 20% or more to maintain consistency towards savings and reduce debt faster.
- Regularly Review and Adjust: Quarterly review your budget to ensure it aligns with your financial goals and lifestyle. Adjust your allocations if your income or expenses change. Ensure that you focus on saving and not increasing lifestyle expenses with increased income.
Remember that the 50/30/20 rule is a general guideline, and individual circumstances may require flexibility. Life events, such as changes in income or unexpected expenses, may necessitate adjustments to your budget. Regularly reassessing and adapting your budget will help you maintain financial stability and work toward your long-term financial objectives.
Example of the 50/30/20 Rule of Budgeting
Here is an example of the 50/30/20 Rule of Budgeting that will help you understand how to analyze and find leakage to fix the same to increase your savings.
| Particulars | Monthly | Annual | Percentage |
| Salary Income (Take Home)- Self | 65,000 | 7,80,000 | |
| Performance Bonus (Net of TDS) | 4,000 | 48,000 | |
| Inflows | 69,000 | 8,28,000 | |
| Food & Grocery | 10,000 | 1,20,000 | |
| House Rent / Maintenance / Repair | – | – | |
| Conveyance, Fuel & Vehicle Maintenance | 14,500 | 1,74,000 | |
| Medicines / Doctor / Healthcare | 1,500 | 18,000 | |
| Electricity / Water / Labour / AMCs | 500 | 6,000 | |
| Mobile / Telephone / Internet | 500 | 6,000 | |
| Household Expenses | 27,000 | 3,24,000 | 39% |
| Clothes & Accessories | 2,000 | 24,000 | |
| Shopping, Gifts, Whitegoods, Gadgets | 2,000 | 24,000 | |
| Dining / Movies / Sports | 2,000 | 24,000 | |
| Personal Care / Others | 2,000 | 24,000 | |
| Travel & Annual Vacations | – | – | |
| Financial Planning Consulting | 1,000 | 12,000 | |
| Charity | 8,000 | 96,000 | |
| Lifestyle Expenses | 17,000 | 2,04,000 | 25% |
| Children’s Schooling/College Expenses | 7,000 | 84,000 | |
| Dependent Expenses | 7,000 | 84,000 | 10% |
| Motor Insurance | 2,000 | 24,000 | |
| Pure Insurance Premiums | 2,000 | 24,000 | 3% |
| Loan Servicing | – | – | – |
| Net Outflows | 53,000 | 6,36,000 | 77% |
| Savings (Inflows-Outflows) | 12,000 | 1,92,000 | 23% |
| Insurance Premiums (Investments) | 3,716 | 44,593 | |
| Mutual Fund SIPs | 9,000 | 1,08,000 | |
| Regular Investments | 12,716 | 1,52,593 | 18% |
| Surplus (Savings-Investments) | -716 | 39,407 | 5% |
| Particulars | Annual Cashflow (Rs.) | Annual Cashflow (%) | Ideal (%) |
| Regular Expenses/ Need | 4,32,000 | 52% | 50% |
| Lifestyle Expenses | 2,04,000 | 25% | 20% |
| Savings | 1,92,000 | 23% | 30% |
If you look at the above table closely. You will find the regular expenses (need) and lifestyle expenses (want) are more than ideal ratios. Here, you must analyze each item to find the expense creating the leakage and fix them to increase your savings.
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Conclusion
Follow the money management formula to manage your money well. Budgeting is a cruck of your personal finance management. Budgeting is a part of financial planning; don’t hesitate to reach a financial advisor if you find difficulty managing it yourself.
Frequently Asked Questions
Q-1: What is the 50/30/20 Rule of Budgeting?
The 50/30/20 rule of budgeting is a guideline designed to help individuals manage their finances effectively. The 50/30/20 budgeting rule allocates your income into three categories: needs, wants, and savings.
Q-2: Does the 50-30-20 rule work in India?
Yes, of course. You must begin your money management journey with 50/30/20 Rule of Budgeting.
Q-3: Can I Modify the Percentages in the 50/30/20 Rule to Fit My Circumstances?
Yes, of course. Follow the age-wise IDEAL BENCHMARK provided above.
The 50-30-20 rule works well for ages up to 35. For ages between 36 and 44, you must consider the budget ratio 50/30/20; for ages above 45, 40/20/40 works well. Adjust your allocation for more savings within range for better savings.
