One of the key challenges of an Indian household budget is to withstand the three-way pull – necessities, wants, and investments.
Necessities are expenses that cannot be avoided. These include EMIs, grocery, bill payments, school fees, insurance premiums, and so on. Spending on wants is a luxury and is obviously optional. These expenses include buying the latest gadgets, eating out, etc. Now, the question is, how much of your monthly income should be spent on each of these categories? Fortunately, a thumb rule exists – the 50/30/20 rule. This rule is just to guide you and help you get started.
What is the 50/30/20 rule, and why should you follow it?
According to the 50/30/20 rule:
- 50% of your monthly income should be used towards necessities
- 30% can be spent on luxuries, wants or desires
- 20% should be saved or invested for a secure financial future or towards your financial goals.
For your overall financial health, it’s important that you follow this rule. However, this thumb rule is a broad guideline and needs to be supplemented with a good financial plan customized to your income levels and financial goals. The path of achieving financial success is when you reverse the equation of ‘Income – expenses = savings’ to ‘Income – savings = expenses.’ That’s a universal truth.
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9 Tips for Managing Personal Finances Successfully
Get started with these tips to manage your money wisely:
List down your financial goals
Spend some time thinking about what you’d like to achieve over the next year, five years, and ten years. Some of your financial goals could include:
- Buying a home
- Going on a vacation
- Paying off debt
- Developing an emergency fund
- Starting a business
- Getting trained on new skills
- Having a child
- Planning for retirement
- Returning to school
- Getting married
- Buying a car
Create a list of your short-term and long-term goals and prioritize them. Give realistic timelines to each of these goals. This will motivate you to develop good money habits to save for your goals.
Create a realistic monthly budget
Your budget is a great tool to help you achieve overall financial wellness. It allows you to create a financial plan that takes you closer to your goals. A budget also helps you decide how to spend your money wisely over the coming days, months and years. Without a budget, you might end up spending your money on things that may seem important now but don’t offer much value in the long run.
Track your spending
If you have no clue where your money goes each month, you need to improve your personal spending habits. Better money management starts with being aware of your spending pattern. Track your expenses across categories (necessities, wants and investments). Once you have the knowledge of your spending habits, you can make a plan to improve them.
Build up your savings
You should set money aside to save each month. Savings strengthen your financial security and also help you get closer to your financial goals. To help you give a general idea, some of the best savings plans and schemes include fixed deposits, mutual funds, chit fund, PPF and many more. We have a detailed article published on the best saving plans and schemes in India. You can give it a read here.
Create an emergency fund
You need to have an emergency fund to dip into when you are faced with unforeseen financial situations. This fund can save you from creating a financial dent and ruining your financial plans by borrowing money at high-interest rates or finding it almost impossible to pay your bills on time. Make sure your savings account is different from your emergency fund account.
Pay your bills on time
Timely bill payment is an easy way to manage your money wisely. When you pay bills on time, you prioritize essential spending and avoid late fees. Strong payment history also helps boost your CIBIL score.
Pay off debt
Debt is a huge roadblock in your plans to accomplish your financial goals. It’s best if you can eliminate debt as a priority. Create a plan to pay your debt off more quickly. Consider the two popular methods of paying off debt: the snowball method (paying small debt first and gradually moving on to the next small debt until all debts are paid off) and the avalanche method (paying off the bigger debt first and gradually moving on to the next big debt until all debts are paid off). Once you are out of debt, commit to staying out of debt. You may have to change your money habits. Otherwise, you can get easily caught in the debt trap again.
It doesn’t matter if you are not able to invest big. Start small and eventually build on it. Investing small amounts from your salary can help you generate more income. Make smart investments and see yourself getting closer to your goals. Read this excellent article on the best investment alternatives in India.
Save for retirement
Even if you have a long way to go until retirement, it’s always wise to start saving early for retirement . The longer you wait, the less money you’ll have to live a comfortable life in retirement. By the time you reach retirement, you should have saved enough to have a lifestyle that you are currently enjoying.
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The path to better money management starts with changing your money habits. Some changes are easy, while some may require drastic measures. The above tips on managing personal finances will help you develop great money management skills that will serve you throughout your life. The trick is to stay committed.