What Is 50/20/30 Rule In Financial Planning? How To Use It?

Struggling to manage your finances and keep them in line with your overall long-term financial goals, here is the rule which can set your budget right, provided you adhere to it.

History of the 50/20/30 rule

The rule first was highlighted by Elizabeth Warren in her book titled All Your Worth: The Ultimate Lifetime Money Plan. The rule by and large classifies spending and too post-tax income that is one is left with month on month:

1. 50%: On rent or loans, food, minimum debt payments, bills plus other essentials

2. 20%: Towards financial goals including savings and investments

3. 30%: For dining, entertainment etc.

While this may look to be simple a rule to follow, in actual practice the limited nature of income flow or unrealistic and over debt burden may not however render it so easy.

So, here is suggested an easy way out to stick to the 50/20/30 rule:

Also read: 6 Rules of good investment to double your income

Here in you can begin by segregating what is essential i.e. what needs to be done or where you cannot get away from deploying your income flow such as the necessary bills etc., grocery purchase or other month on month commitments such as child's tuition fee etc.

Also, you need to allocate for aggregating wealth in the long run for various financial goals. And the rule suggests an allocation of 20% of your monthly income towards an emergency fund, mutual funds etc.

In the process, you also need to understand different wants you have from time to time and which can be avoided as these are only ways to upgrade your lifestyle. Here in before splurging on such wants, you surely need to do a reality check.

To assist you in the process, we list the 3 steps that you can follow, to be financially healthy in the long-run:

1. Calculate your disposable income: For doing this you need to consider the different tax elements that are deduct from your gross salary, and this is the net salary you take away home month on month, provided there is some incentive earning in a particular month.

2. Savings and investments need 20% allocation of your monthly income: Betting on the rule is not an ultimate you have, but surely you can have a secure financial future, if you deploy 20% of your earnings and plan for your various financial goals early in life. In early stage of your career, it will be good to not give in to your different wants.

3. Differential your needs from wants:

This is the most tough tasks but careful evaluation can help you realize what want of your can be skipped with slight inconvenience. Herein again, we will like to state as per the rule, the necessities should not go beyond 50% of your net income, or else you need to fine tune your earning sources accordingly.

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