50-30-20 Thumb Rule Of Budgeting
50-30-20 rule of thumb was introduced by Harvard bankruptcy expert Elizabeth Warren and her daughter, Amelia Warren Tyagi in their book, "All Your Worth: The Ultimate Lifetime Money Plan".I like the concept of 50-30-20 rule of thumb of budgeting and can useful for you in creating your monthly budget plan .
Most of us when either do not have any monthly budget plan or one with no classification of our priority and non priority expenses. We end up splurging on unwanted stuff resulting in our monthly budget to go haywire. There is need to give priority to our "needs" and put limits on our "wants". There is also a dilemma "what percentage of monthly salary should I save ?".This is where 50-30-20 rule of thumb of budgeting comes to our rescue.
How does 50-30-20 rule of thumb work ?
First calculate your monthly take home salary after all deductions and payment of taxes.
50 percent for Needs: “Needs mean the basic necessities which you require to lead normal life. Under “needs” you can categorize expenses like groceries, utility bills, transport cost, house rent etc.Your total expenses on your “needs” should not exceed 50% of your salary.
30 percent for Wants: Your lifestyle expenses like dining out, entertainment expenses, holiday trips etc can be classified as “wants”.Your total expenses on your “wants” should not exceed 30% of your salary.
20 percent for savings and debt repayments: Your savings and debt (loan) repayment should be atleast 20% of your income.
20% for saving might look too low, but this is 20% of your take home salary and not gross salary. Take home salary does not include deductions like provident fund, gratuity and superannuation benefits. Thus you are already saving some amount in form of these deductions.
One may find 30% for “wants” more suited for people in western countries as they comparatively spend more on life style expenses. One can tweak the thumb rule to allocate 30 percent to savings and 20 percent to life style expenses.
Majority of people who have lately taken a home loan will find more or less 50% of their income is spent on loan EMI. It will impossible for them to limit their “needs” to 50% of income, so they should spend less on “wants” to cover the shortfall. Going will be tough in initial years, but as your income steadily rises you will have more money available to spend on your “wants”.
50-30-20 thumb rule may not be like one size fits all design, but can used as reference to create your own home budget plan.Go ahead and create your own monthly budget.