How 50/30/20 Budgeting Can Improve Your Finances?

By breaking down expenses into easily understandable categories, it becomes easier to manage your income and achieve financial security

Many of us often tend to overspend, as we are unable to differentiate between our real needs and non-priority items. This habit eventually leads to high credit card bills or increasing debt. Such impulsive behavior is one of the key reasons for loan defaults. But what many people do not realize is that managing one’s income can be quite easy. Especially with simple budgeting approaches like the 50/30/20 rule.

What is 50/30/20 budgeting rule?

According to the 50/30/20 budgeting rule, your income needs to be grouped into three different categories. 50 refers to the 50% of your income that should be allocated to non-avoidable expenses. It includes expenses such as utility payments, groceries, insurance, healthcare expenses, child’s school or college fees, etc. The 30 refers to 30% of your income that you can use as expenses for maintaining a specific lifestyle. For example, you may want to dine out, buy a membership to a club, travel to explore the world, buy luxury items, etc.

The remaining 20 refers to the 20% of your income that should be used for savings and investments. Life is uncertain and there can be unforeseen financial needs in the future. That is why you need to be ready to deal with such unpredictable challenges. Savings will also be needed to fulfill your long-term goals such as buying a house, retirement planning, etc.

What are the benefits of 50/30/20 budgeting?

Easy to understand and use – The 50/30/20 budgeting rule can be easily understood by most people. It is also easy to implement and does not require any advanced tools. It can work on just a notepad or you can use an Excel sheet for easy calculations.

Balanced approach – Some level of financial freedom is needed to live a fulfilling and meaningful life. One cannot be asked to focus solely on needs and savings. The 50/30/20 budgeting rule ensures that you have ample money to fulfill your lifestyle needs. This balanced approach makes the 50/30/20 rule successful even in the long-term.

Suits all incomes – While some adjustments may be needed based on personal preferences, the 50/30/20 budgeting rule meets the requirements of a wide range of income levels. Irrespective of whether your income is 10 lakh or 20 lakh, the 50/30/20 rule will remain workable in both cases.

Sustainable spending habits – With a 50/30/20 budgeting rule, users can learn financial discipline. Over a period of several months, the 50/30/20 rule will transform into sustainable spending habits. This is exactly what one needs to achieve financial security and financial freedom.

As is evident from above points, the 50/30/20 budgeting rule can be quite beneficial. Provided that you follow it in a methodical manner and make it a part of your life. Depending on your varying and evolving needs, you can also make slight adjustments.