You get salary every month, but your budget is unbalanced. Unable to decide where, how much to spend and how much to save. As a result, you get worried about how to manage your monthly budget. If you make a wise decision about your spending and saving every month, then you can feel mentally and financially at ease. According to ICICI Pru Life, there is a 50-30-20 rule for monthly budgeting, which can help you in this. This rule simplifies the process of saving and spending by classifying your budget into three main categories – needs, wants and savings. It can help you achieve financial security for your future needs while managing your current expenses effectively. Let us understand this.
50-30-20 rule of budget
According to the 50-30-20 rule, you should separate your post-tax income into three broad categories. It’s 50% for your needs, 30% for your wants and 20% for your savings. When you set aside a certain amount of your income for each category, you are less inclined to withdraw money from one category to another.
50 percent for needs
According to ICICI Pru Life, 50 percent of your income should be kept aside for your needs. Your needs refer to your essential expenses, financial and other responsibilities. These may include rent, utilities, groceries, health care, insurance premiums, child’s school or college fees and more.
30 percent for wishes
The next 30 percent of your income can be used to meet your needs. For example, you may want to eat out, watch a movie or play in a theater, pursue a hobby, go on a vacation, buy luxury goods like watches or bags, non-essential electronic items and much more. Wants may never be needs, however, setting aside 30 percent of your income for needs allows you to enjoy what you want while maintaining financial discipline.
20 percent for saving
The last 20 percent of your income should be allocated to savings and investments. Savings provides you a cushion for any financial emergencies, medical treatment, home or car maintenance and much more. Savings also help you achieve your long-term goals, such as buying a house, your child’s higher education or marriage, a comfortable retirement, etc. Savings also help you avoid getting trapped in debt. They reduce financial stress and anxiety, allowing you to focus on more important aspects of your life.
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