How to Master Smart Budgeting With The 50-30-20 Rule?

• The 50/30/20 rule splits your income into three key categories: 50% for needs, 30% for wants, and 20% for savings and investments. 

• It’s an easy-to-follow method that helps you manage expenses while saving for the future.

• The rule works well for millennials and Gen Zs, helping to balance lifestyle desires with financial security. 

• It also helps you prioritise vital expenses first, so you never miss out on covering necessities. 

To build long-term financial stability and hit your money-oriented goals, budgeting your finances is crucial. There are many budgeting methods, but one of the most popular and easy-to-follow methods is the 50/30/20 rule. 

This strategy is all about simplifying your spending by splitting your income into three key categories. It’s a straightforward way to keep track of your money and helps you manage expenses while saving for the future.

As per the rule, you must distribute your income after paying taxes into three categories. You must dedicate 50% of your income to your needs, 30% to wants and 20% to savings and investments. 

This needs-wants-savings ratio helps you manage your expenses and contribute to savings for emergencies and other needs. 

• 50% to Needs: 50% of your income, post-tax filing, must go to the needs account. In this category, you must save for your financial obligations, essential needs, and other expenses. 

These may include utility bills, groceries, rent, insurance premiums, healthcare, and children's education fees. 

• 30% to Wants: 30% of your income must go to the wants category, ensuring that you are saving to manage your lifestyle. You can save this amount for buying expensive items such as a car, electronics, non-electronic items, watches and more. 

By keeping aside this part of your income, you can ensure that you save for your lifestyle while maintaining financial discipline. 

• 20% to Savings: The last 20% of your income left after paying taxes must be included in the savings and investment category. You can use this fund to fulfil your long-term goals, like buying your own house, car, children's education, retirement, wedding, and more. 

Some benefits of the smart budgeting rule for millennials are balancing lifestyle needs in the present, long-term financial security, and prioritising necessary expenses. 

Millennials and Gen Zs face unique challenges when it comes to their needs and lifestyles. The 50/30/20 rule is a simple way to help balance things out, managing both wants and needs while keeping up with the cost of living in a city. It’s an easy way to stay on track without sacrificing the things that matter most.

By investing 20% of your income, you can save for your long-term goals as security. This practice helps you secure an amount for unexpected needs. 

Through this method, you can better manage finances, ensuring that vital costs are covered first. While spending on your needs, you can save for the future.

To adopt this rule, you must start by calculating your monthly income after deducting estimated taxes. 

To apply the 50/30/20 rule, you can follow these steps:

1. Calculate your monthly income after deducting your taxes. 

2. Make a list of your needs and wants from your previous month using statements and bills. 

3. After you have a cost estimate, divide the amount into these three categories: needs, wants and savings.

4. Compare your current monthly allocation to make adjustments to it.

5. With this budget in front of you, start planning your future expenses as per this rule.

Here’s an example. Assume that your net income is ₹1.20 lakh. After making tax deductions of ₹20,000, the remaining income is ₹1 lakh. Now, you will have utility needs for housing rent, utilities, insurance, transportation and children's education and insurance. 

• The first 50% will be dedicated to your needs. The total comes to ₹50,000. 

• The second 30% will be dedicated to your wants. The total comes to ₹30,000. 

• The last 20% will be dedicated to your investments. The total comes to around ₹20,000.

One of the most crucial steps to ensure your 50/30/20 budgeting method is on track is to review and make adjustments. Here’s how:

Reviewing and adjusting your budget according to your income is a crucial tip in the 50/30/20 rule. Since your income is a dynamic asset and unexpected costs can arise, your financial priorities can shift. To make sure that your financial expenses are covered and the rule is followed, revisit your budget frequently and make changes as per your goals.

For instance, if you receive a bonus with your salary, you can allocate more funds to your savings or investment category. Alternatively, if you allocate some amount for a medical emergency, you may decrease the amount of funds in each category to stay on track for the long term.

The 50/30/20 rule in budgeting means you must dedicate 50% of your income to your needs, 30% to wants, and 20% to savings and investments.

Yes. This rule is suitable for all income levels as it does not have a limit but provides a clear budgeting framework for you to spread your income across categories. 

In the rule, 50% is dedicated to your needs and you can save 20% for your income that must go towards debt management. 

Yes. You can customise the percentage of the 50/30/20 rule based on your priorities and financial goals. 

As per the 50/30/20 rule, you must revisit and make changes to your budget whenever there are changes in your spending habits and financial goals.