Personal Finance: Understanding the 50-30-20 Budget Rule

The 50-30-20 is a percentage-based budget rule that talks about allocating an individual’s monthly net income into three components: 50% on needs, 30% on wants and 20% on savings. 

Allocate 50% to the needs bucket, which includes those bills that are absolutely essential to pay and remain a necessity for maintaining life. These include house rent or mortgage payments, daily travel expenses, groceries, insurance, healthcare expenses, minimum debt payment, and electricity bills.

Then, allocate 30% to wants bucket, which relates to all the spending on things that may not be absolutely essential. This includes dining out, going on vacations, and purchasing a luxury watch or the latest electronic gadget. In short, it includes everything and anything related to expensive acquisitions. Anything listed in the wants bucket is actually optional.

Finally, aim to allocate 20% of the net income to savings and investments. This includes adding money to the emergency corpus in a bank savings account, allocating to a mutual fund account, and investing in the stock market. This allocation is also the mainstay towards the retirement plan. Ideally, one should have at least three-six months of emergency savings on hand to address any unforeseen circumstances.

While there’s no one-size-fits-all approach when it comes to budgeting considering it all depends on an individual’s income, fixed costs and financial goals, the overall idea behind the 50-30-20 rule is to inculcate a healthy habit of managing money in a simplified way.