Budgeting plays a big role in that it tells you how to save money. If you wait until you earn enough income before you start saving, that day may never come.
Irrespective of your income, planning a monthly budget makes a lot of sense. Budgeting is the core of financial planning. For any long-term financial planning to be successful, you first need to create and follow a solid budget.
Most people see a budget as a tool to record expenses, but it is actually a money management tool. A budget tells you what your income is and therefore how much you can spend. As a money manager, you need to prioritise your budget between your needs and your aspirations. There is a subtle difference between them.
Budgeting plays a big role in that it tells you how to save money. If you wait until you have earned enough income before you start saving, that day may never come. Saving does not mean putting aside what is left after spending. Saving means setting a goal and then managing your expenses around it. Let us understand the 50-30-20 rule for money management here.
50-30-20 rule
The 50-30-20 rule gives you a broad outline of how you should run your household budget and you can always make small changes here and there. According to SBI Securities, it makes money management easier by giving you a predictable model of how much to spend on wants, how much to spend on needs, and hence how to save money for all of these in the end.
Understand the rules
- The rule stipulates that half or 50% of your net income (after tax) should be set aside for your needs. This includes expenses for food, clothing, rent, healthcare, insurance premiums, children’s education, financial obligations, etc. According to SBI Securities, these are basic needs and you cannot make much compromise or adjustment in this segment.
- The second part of the rule is to allocate 30% of your income to fulfill your desires. For example, this could include an ambitious lifestyle, a bigger house, pursuing hobbies, vacations, entertainment, etc. You may not use the entire 30%, but any amount not used can be used as part of your savings. This is the part that is flexible and where you can make changes to improve your savings.
- Finally, 20% goes into your savings. This includes savings for emergencies, medium-term goals like home loan margin, car loan, long-term goals like retirement, child’s education, etc. Here, 20% of net income is considered after tax and PF deductions. That means your effective savings will be much more than 20% of your net income and is a support for your financial well-being.
