Worried about your finances? This budget rule can help you

  • February 23, 2021 08:03 AM AEDT
  • Ashish
    Ashish
    Financial Journalist Ashish
    58 Posts

    Ashish is a Financial Journalist with an experience of nearly 9 years in the field of economy, stock market and foreign affairs. He has also spent a few years in the corporate sector. A mechanical engineer with post-graduation in marketing and operat...

Worried about your finances? This budget rule can help you

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Summary

  • According to the 50/20/30 budget rule, a person should spend 50 per cent of his after-tax income on most urgent needs and obligations.
  • The other half should be divided between - savings & debt repayment (20 per cent) and other things you might want (30 per cent).
  • The personal finance experts often advise this rule for the individuals seeking tips to manage funds for emergencies and retirement.

Ever heard about the 50/20/30 budget rule? The tool is an excellent plan for people to reach their financial goals. According to the rule, a person should spend 50 per cent of his after-tax income on must-have needs and obligations. The other half should be earmarked for savings and debt repayments (20 per cent) and 30 per cent for the things you might want. Here we discuss the different aspects of the rule in detail:

The rule found much popularity after US Senator Elizabeth Warren mentioned it in her book - All Your Worth: The Ultimate Lifetime Money Plan. The personal finance experts often advise this rule to the individuals seeking tips to manage funds for emergencies and retirement.

Image Source: © Cmmeraydave | Megapixl.com

50 per cent needs

According to the rule, 50 per cent of needs are those a person must pay for since these are required for survival. These include groceries, health care, and utilities, among others. The items such as restaurant dining are not included in the list. The rule says that half of the after-tax income of an individual must cover these needs. If an individual is spending more than the needs, he would have to slash his wants or downsize the lifestyle.

Image Source: © Cmmeraydave | Megapixl.com

30 per cent wants

These include the things which are not essential, but still a person prefers to splurge on them. These include movie tickets, vacations, latest electronic gadgets, among others. A person can reduce the ‘wants’ bucket by compromising a little. For instance, he could cook delicious meals at home rather than eat out or work at home instead of going to the gym.

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20 per cent savings

The rule advised every individual to allocate 20 per cent of his net income for savings and investments. It includes investing in a mutual fund or the stock market. A person should have at least three months of emergency funds in case of an unforeseen event. Besides, the focus should be on building retirement plans.

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