These days everyone is cautious about their physical fitness. Similarly, we should also take care of financial fitness. Financial fitness shows how strong and efficient our deposits are. This shows how you are capable of handling a situation in an emergency. To maintain financial fitness, you need to understand the balance between spending and saving.
A simple budgeting approach that can help you successfully, easily and sustainably manage your money and budget is the 50-30-20 rule. This formula can prove to be very effective in strengthening our financial fitness. Let us understand today the 50-30-20 rule of money.
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What Is the 50-30-20 Budget Rule?
The 50-30-20 formula says, those who invest 50% of their income on essential expenses, 30% on their own expenses and the remaining 20% in savings will enjoy in the old age as well as the present. The basic idea is to divide your post monthly tax income into three categories: 50% for needs, 30% for wants, and 20% for savings. You can easily do this with the help of financial planning. The 50-30-20 rule is a great way to add discipline to your spending habits and achieve your financial objectives.
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The first rule is that 50% of your post tax income should be set aside for essential needs. Necessities are unavoidable expenses without which it is not possible to survive. Your most urgent expenses should be covered up to 50% of your tax income. You must try to include your expenses well within the 50% bracket. If your needs require more than this, then you will have to reduce your needs or reduce your lifestyle expenses to fit in your budget.
Some examples of requirements:
- Living expenses like rent or mortgage.
- Monthly bills which will include cell phone bills, credit card bills or electricity bills.
- Food: Grocery purchases and food are other examples.
- Other necessary costs based on individual needs like health care, car insurance etc.
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The next 30% is to be kept for non-essential needs or for things you wish. Basically, it is money spent on making life more comfortable and enjoyable.
Some examples of wants:
- Hobbies, gym etc.
- Dining out.
- Entertainments such as movies and adventure.
- Vacation costs such as flights, hotels and entertainment.
The last part of the post tax income, i.e. the remaining 20% should be part of your savings. It can go into your savings account or investment plans. Keeping 20% of your earnings on a monthly basis can help you build a stronger, more long-term savings strategy. It can help you maintain an emergency fund for future use or build a corpus to meet any goals in the later years.
It is also important to identify and set your financial goals while budgeting. You can allocate the 20% in the following:
- Mutual funds
- Clearing debts and loans
- Emergency Fund
- High Yield Savings Account
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How Does the 50-30-20 Budget Rule Work?
Benefits of the 50-30-20 Rule of Budgeting
Life is to be enjoyed, but spending your money extravagantly is not the correct way either. So having a plan and sticking to it can help you cover your expenses, save for retirement, as well as allow you to do activities that make you happy.
- The 50-30-20 budget rule is intended to help individuals plan how they should manage their income more seriously.
- Saving just 20% of your income can help you a lot in the long run.
- It also provides an opportunity to save more and more for retirement and emergency situations or pay off debts.
- It can help people manage their finances, making it a versatile personal budgeting option.
- Since this budget is easy to make, it can help people to maintain their budget and achieve their long term financial objectives.
- We can achieve financial freedom if we consistently follow this 50-30-20 rule of budgeting.
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How to Apply the 50-30-20 Rule of Money?
1. Estimate your total income and expenses
First of all you should track all your sources of income. Next, you should track your expenses and decide whether your expenses are fixed or variable.
2. Identify your needs and desires
It is important that you figure out which transactions are your needs and which are wants so that the budgeting process becomes easier for you. After separating your needs and desires, allocate 50% of your funds for your requirement and 30% for your wishes.
3. Set aside funds for your savings
Set aside the remaining funds for your savings. You can use this savings to fund your investments or even maintain an emergency fund or a rainy day fund.
Why should you set aside this money if you’re not using it at all? Why can’t you spend it all? This is because we don’t know what problems we might face in future, and some extra money is always helpful in such cases. From medical emergencies to retirement planning, savings are the lifeline that can stop us from being completely helpless when we face financial difficulties and need money urgently.
Here are a few financial products, where our saved deposit can generate wealth for us: a savings account, a recurring account, investment in stock market, chit funds etc.
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Chit Fund- An Excellent Saving as well as Investment Alternative
When you have money, finding a suitable investment opportunity should be your first priority. Which investment plan is best, and how do you decide? It would be wise to invest in an investment plan that offers high returns and permits withdrawals whenever required. Savings and investing decisions, however, vary from person to person and are influenced by a number of different circumstances. Chit fund is one such scheme that lets you make investments and earn interest on your money. It is a unique way to save money because the tenure or maturity period is short and the monthly contribution is small and hence easily affordable
In a chit fund, a specific number of people invest their money with a promise that their investment will be multiplied within a short span of time with surety and guaranteed return. The rate of return generated by saving using a chit is much higher than what is offered by banks. Banks offer 3%-6% annual returns whereas, the returns on chit funds can be between 15%–20% on an average.
The Money Club is India’s best AI–driven digital chit fund platform founded by ex IIT, INSEAD and UCLA alums. Through the Money Club mobile app you can join a club with other verified peers and pool up money regularly. The Money Club runs clubs on a daily, 3-days, and weekly basis to help you earn returns in a short time or borrow when you have a need. The 50-30-20 rule is a popular personal finance thumb rule that sounds logical and at the same time is quite easy to follow.
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If you follow this 50-30-20 budget rule in your life then surely your personal finance management can get better. Through this, along with enjoying life, you can also create a fund for future emergencies.