50-30-20 Rule of Money is the Answer to Your Dreams

Looking to save money but have no idea how to begin? The easiest rule you can follow is the 50-30-20 rule. It helps you divide your money into needs, wants and savings.

The rule is straightforward, straightforward, and intuitive. It can also be used on practically any financial earning scale. Several people have discovered a simple way to achieve their goals by following this simple money allocation strategy.

Requirements The rule only applies to your after-tax income (also known as in-hand income).)

The Needs – 50%

Needs are expenses and bills that you simply cannot ignore. Rents, utility bills, loan EMIs, grocery expenditures, fuel, and other expenses are examples.

These are the must-haves, and they exclude leisure activities such as purchasing a streaming subscription or dining out.

According to the guideline, you must spend half of the money you receive after taxes on meeting your requirements. If you spend more than this, you must find a means to reduce your wants.

Perhaps you might consider moving to a property with a lower rent, or perhaps you should save more on energy and water if you have been wasting them. If you own a car, you should drive less and instead use public transportation or carpool.

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The Wants – 30%

Wants are the items you purchase to improve your quality of life. These, however, are not required. It falls under wants if you intend to go on vacations or spend time at your favorite restaurant for dinner on the weekends.

If you have been spending more than 1/3 of your income on wants, it is simple to reduce them because they are not necessary for daily functioning. You can work out at home instead of going to the gym.

You might also learn basic culinary skills and avoid eating out. In fact, you can skip buying a TV by using a streaming service to access all material from your PC or laptop.

These decisions also fall under the category of wants if you’re looking to improve something in your life. For example, if you decide to buy a larger car instead of your present one, or if you decide to relocate to a more expensive home than your current one. As a result, the better decisions you can make about spending on wants, the more money you can save.

The Savings – 20%

A fifth of your net income, or 20%, must be set aside for savings and investing. It has to be a part of this 20%, whether you’re putting money into an emergency fund or paying into your monthly SIPs.

As an emergency fund, you should always have at least three months of your monthly in-hand pay or income. If you have lost a job, this money can be saved for a rainy day until you find another. If your main source of income has dried up, you can use the money for medical expenses or to pay off your EMIs.

If you’re wondering whether loan repayments count as savings, they don’t! However, if you can afford to pay more than your default EMI, you can do so from your savings account. This allows you to lower future EMIs or shorten the payback period.

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Takeaway 

This rule can be used to manage your wealth regardless of your income level. You have more power over your desires than anything else, and the better you manage them, the more money you’ll save.

Yet, there are ways to reduce your demands as well, and these are often larger decisions such as moving or selling a car. Use this guideline to ensure complete control over your revenue and expenses at the end of the day.

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