Personal Finance: Here’s How to Manage Household Budget Effectively

For most individuals, managing household finances may seem like a tough nut to crack. However, it needn’t be so if you adhere to the 30/30/20 rule and investing regularly. 

Understanding the 50/30/20 rule: The 50/30/20 budget rule is quite simple in practice. It involves breaking your in-hand income into three parts. At least 50% of the income goes to needs, 30% to wants, and 20% to savings and investing. 

This way, you will create a pattern of set buckets for everything and operate within the permissible amount related to each bucket. This will inculcate a sense of discipline while at the same time ensuring you neither compromise on the quality of living nor plan for your long-term goals. After this, let’s understand how to categorise your spending buckets into needs, wants, and savings. 

It is important to note that in the absence of social security benefits comparable to those of Western countries, Indians may be required to save and invest a larger portion of their income. About 50% of the income will be directed towards needs, which include housing, groceries, transportation, bills and utilities, health insurance, etc.

Similarly, 30% of the income will be directed towards wants, which include travel, entertainment, restaurants, shopping, hobbies, etc. Finally, 20% of the income comprises emergency funds, debt payments, retirement, investing, etc. 

However, the rule may not apply to every individual. Considering the individual circumstances and the risk tolerance, it is better to reach out to a professional finance expert to seek sound advice. 

Stay regular with investing: It is important to understand the value of prudent savings and investments. For an individual, the decision to allocate 20% of their monthly income to savings and investments could pave the way for the journey to investing in mutual funds.

Before starting the investments, it is crucial to classify financial goals into short-, medium-, and long-term goals. Whether it’s buying a house, going on a vacation, purchasing a new car, or preparing for retirement, an individual needs to classify them as short-, medium- or long-term to determine the appropriate mutual fund schemes. After understanding the benefits of diversification, one can seek funds across asset classes like equity and debt to address different financial goals.

Exploring mutual fund schemes: For long-term wealth creation, for goals with a longer time horizon, an individual can opt for equity funds. For short-term goals that aim to provide stable returns and to create an emergency fund, one can opt for debt funds.

For retirement goals, one can decide to invest in retirement-oriented funds as they are designed to help achieve retirement goals.

This way, an individual can feel a sense of empowerment and financial security. The decision to invest 20% of savings in mutual funds not only aligns with the 50/30/20 rule but also becomes a foundation of strategy for building long-term wealth.

As a combination, budgeting and mutual fund investing can emerge as a powerful tool as it not only instill financial discipline and mindful spending but can also play a pivotal role in helping an individual achieve their goals.