If personal finance was part of your academic life, congratulations, you’re already ahead of many individuals who have to learn from mistakes.  

From budgeting to managing your personal expenses and saving your surplus earnings for the future, personal finance involves planning your money thoughtfully.  

However, it’s not always easy to do. Whether you earn in six figures or on a daily wage basis, it’s important to think of personal finance to maintain your life properly.  

There’s a rule called the 50-30-20 rule of money and it’s one of the most effective ways of utilising your income to its fullest potential.  

Once you apply it to your personal budgeting, you can better manage your financial emergencies and live a life without stress. In fact, you can progress with more complex investment initiatives and use up-to-date charts for trading.   

This article explains the rules of money and how to utilise it for better financial health. So, read on to explore.  

50-30-20 budget rule explained   

It’s easy to use the 50-30-20 rule of money. All you have to do is evaluate your monthly income and allocate your income across different areas of expenses as per the ratio explained in this rule. Here’s how this rule of budget works – 

The 50-30-20 rule of money gives you a clear picture of your earnings and allows you to manage your expenses without you having to compromise on your necessities. The rule divides your earnings into three different categories.  

50% for needs 

Keep 50% of your income for your needs. This involves setting aside 50% of your monthly income from your regular expenses. You have to use this amount for managing your personal expenses, which are essential and cannot be helped.  

Here, you use half of your tax-free income to maintain expenses needed for your survival. It includes necessities like food, shelter, and health. Some key components of this part of your expense include – 

• Rent 
• Mortgage Payment 
• Car payments 
• Groceries 
• Minimum debt payment 
• Utilities etc.  

But if you see that the necessity part of your income is taking more of your tax-free income, then it’s better to adjust your lifestyle. Maybe relocate to a smaller home or cut costs on expensive groceries and so on.  

30% for Wants 

The next phase involves putting money aside for things that are in the list of things that aren’t essential but necessary. For example, you can work out at home instead of paying a high amount in gym subscription.  

It’s better to spend on a monthly OTT subscription than spending three times for movie tickets every month.  

Instead of having a luxury sedan, you can opt for a regular and more economical SUV. It would also be wise to cut down on subscriptions you no longer need. The expense in the want section can be managed or compromised for the need part. For example – 

• You don’t necessarily need a luxury bag. 
• VIP tickets to events.  
• New gadgets.  
• Going for extravagant services when regular ones are enough.  

20% for Savings 

Coming to the next part of the law of money, we must keep 20% of the tax-free income in the savings category. This is the amount you keep for your personal planning.  

It can be for your investments. First start with three months' worth of income to back yourself up during emergency situations. Then keep putting your money into different areas of investment.  

You can think of provident funds, mutual funds, forex trading, or stock investments. There are already plenty of free resources and up-to-date charts helping with stock investments. The 20% of tax-free income you save will prepare you for your retirement. The key components of these savings include – 

• Emergency funds.  
• 401 K investments. 
• Provident funds.  
• Stock and mutual funds.  

How to Apply the 50/30/20 Law of Money? 

It’s not difficult to use the 50-30-20 law of money. Start by using these easy steps – 

First, calculate the monthly income. It could be a take-home salary or the net profit you keep from your small business.  Analyse your average spending and the areas in which you spend. 

It’s also important to calculate your own spending threshold. This way, you’ll have zero chance of overspending and use your money effectively. You don’t want one spending category to take over the funds of another category.  Evaluate your spending and adjust according to the 50-30-20 rule of money.  

Conclusion 

The 50-30-20 law of money is an ideal solution to managing your money. In practical life, it may not be easy to adjust your finances according to such a rule of thumb. However, you can improve your approach to financial management with such laws and money management rules.  

It’s best to discuss with a financial expert if you’re in big debt or planning to take out a significant amount of financial help. However, this rule should help you create a baseline for monthly budget and live life peacefully. 

The content provided above has been sponsored by Mashum Mollah.
Mashum Mollah is a Tech Entrepreneur, Digital Marketing Expert and Founder of Viacon, Blogger Outreach, and many more tech platforms. He is on a mission to help small businesses grow online.