Is inflation is eating into your earnings? How 50/30/20 rule can help you

With the rising cost of living and inflation steadily eroding the value of your hard-earned money, it has become crucial to take control of your finances to secure your future. One effective method to achieve this is by adopting a solid budgeting rule. One of the highly popularised budgeting rules for income is the 50/30/20 rule, which provides a structured approach to managing your income and allocating funds wisely. 

What is the 50/30/20 rule of budgeting?

According to the 50/30/20 rule, you should allocate your post-tax income into three main categories: 50 per cent for basic needs, 30 per cent for wants, and 20 per cent for savings. This structured approach ensures that you designate a specific portion of your income for each category, helping to minimise the temptation to shift funds from one category to another.

“The 50/30/20 budgeting rule provides a straightforward and practical framework for financial management. It ensures a well-balanced spending habit by dividing income into essential expenses, discretionary spending, and savings. This approach fosters financial discipline and stability, especially for those new to personal finance,” said Chakrivardhan Kuppala, Executive Director and Cofounder at Prime Wealth Finserv. 

A breakdown of what constitutes ‘Needs, Wants, and Savings’: 

50 per cent for ‘Needs’: This portion, typically the largest, should cover your essential expenses. This includes rent, electricity, utility bills, loan instalments, minimum credit card payments, and insurance premiums. These are expenses crucial for your survival and should not be delayed.

30 per cent for ‘Wants’: This is your entertainment fund. You can use this portion for non-essential spending like shopping, hobbies, and leisure activities. It's important to draw a clear line between needs and wants, ensuring that you don't spend impulsively.

20 per cent for ‘Savings’: This portion is dedicated to building your financial safety net. It's essential to save and invest for future financial security, especially at a time when there is job uncertainty and rising costs. Aim to build an emergency fund covering certain months' worth of your average monthly expenses, and consider long-term financial planning and investment to achieve your life goals.

 “An emergency fund should cover 3-6 months of living expenses. Start by setting aside a small, achievable amount each month, gradually increasing it as possible. The fund should be kept in a liquid yet safe account, easily accessible during emergencies," said Kuppala.

It might not be easy for everyone, but here are some simple steps to get you started:

Determine your total income, this includes your salary from a full-time job, any income from freelancing or short-term projects, and any other sources of earnings.

Split your total income into three categories: 50 per cent, 30 per cent, and 20 per cent. 

Identify and classify your expenses as ‘needs, wants, and savings’. 

Track expenses according to your budget. You can use budgeting apps or maintain a regular expense diary. 

Adjust spending habits to align with the 50/30/20 rule, and review and revise your budget periodically.

“There are various apps like Walnut, Money View, Monefy etc. that can help you keep a tab on your monthly expenses, categorize them, and provide insights on your spending habits. These apps sync with your bank accounts and automatically categorize your transactions, making it easier to adhere to your budget, said Aryaman Vir, CEO of Wisex. 

The importance of distinguishing ‘needs’ from ‘wants’

By allocating your income to needs, wants, and savings in the specified proportions, you can build financial discipline, ensure financial security, and make well-informed spending decisions. However, differentiating between needs and wants is a fundamental aspect of the 50/30/20 rule. 

“Sometimes, people get mixed up and think things they want are things they need. It's important to be clear about this so you don't spend too much on stuff that's not necessary, which can mess up your money situation,” said Yashoraj Tyagi, CEO & CTO, of Sqrrl, a wealth-management platform by CASHe. 

Aryaman Vir from Wisex suggests, “When the urge to buy something strikes, add it to your cart but wait for 10-15 days before making a decision. If the desire persists and the item seems essential, reassess if it’s a need or a want. For instance, feeling the need to upgrade your smartphone could initially seem like a necessity. However, upon reflection, if your current phone functions well, this upgrade is a want, not a need.”

Failing to stick to a budget can result in overspending, insufficient savings, and the risk of a financial crisis. It may also lead to mounting debts, difficulty handling unexpected costs, and a lack of financial stability for the future. Maintaining a well-balanced budget is essential for ensuring long-term financial well-being.