What Is 50/30/20 Rule?
The 50/30/20 rule gives you an overall plan for the spending of your after-tax income, according to the 50/30/20 rule you should spend 50% on needs, 30% on wants, and 20% on saving and investment of your after-tax income. Every earning individual should adopt the 50/30/20 rule. The 50/30/2o rule is very important for every earning individual.
Under 50/30/20 there is planning for your monthly income, where you have to spend and how much of your income is the very first question you have to think after receiving your monthly income. Budgeting is the main logic of the 50/30/20 rule for your personal finance.
Why 50/30/20 Rule Is Important?
Budgeting is necessary for maintaining your income and for a good lifestyle too. You cannot afford to spend your money anywhere, anytime; you should have a proper plan for spending your income. For overall financial wellness, the 50/30/20 rule for personal finance is a better answer for your every question related to your spending from your income.
This 50/30/20 budget rule is popularized through Senator Elizabeth Warren by her book, All Your Worth: The Ultimate Lifetime Money Plan. Her book now helps a lot for every earning individual globally.
Calculate Your After-Tax Income
When you get paid for your monthly work and you get your income, there are a lot of taxes imposed on your income, taxes such as state tax, local tax, income tax, medical and social security.
It is easy to figure out the after-tax income for an employee or worker with a steady paycheck.
It is better for the self-employed earning individuals; their after-tax income is a good profit for them. A self-employed after-tax income equals your gross income minus your expenses that you have invested for your work. The 50/30/20 for personal finance only applies to after-tax income, so it is important to find out your after-tax income.
Spending on your needs
You can spend 50% of your monthly after-tax income on your needs. Needs categories those activities and bills which cannot be ignored and are essential for survival. Needs include rent or mortgage payments, car payments, groceries, utilities, health insurance, and car insurance too.
You have to follow the 50/30/20 rule strictly on your needs. Half of your after-tax spending is done on your needs and surely it will be enough for your lifestyle according to your income. Needs are “must-haves” things. The luxuries like dining out, tour are extra for need loss. These are not essential for survival. Let’s take an example if your after-tax income is Rs 20,000, then you should strictly spend its 50%, Rs 10,000, for your needs. It is important to control your needs too.
Spending on your wants
Wants are those things that are not really essential for survival; they are wanting of humans for their lifestyle. You can spend 30% of your total after-tax income. Gym membership, vacation, and tours, movies and sports tickets, subscription to online streaming websites, dining out, ultra-high-speed Internet, etc. are some examples of want. Wants are not limited wants to come to a really vast topic.
Wants depends on your will power as well, so you have to be strong from your power to avoid some unnecessary expenses. Some want to waste your important income, so it is important to control your wants. Let’s take an example if your after-tax income is Rs 20,000, then the limit to spend on your wants is Rs 6,000, 30% of Rs 20,000, you should definitely don’t spend more than this.
Spending on your saving and investment
Finally, the most important spending after the need is saving and investment. You can spend 20% of your after-tax income on saving and investment. Some examples of saving and investment are bank saving accounts, mutual funds, etc. Saving and investment helps a lot in an emergency situation, so it is better to take care of spending your after-tax income on saving and investment more than wants. Saving and investment help a lot after your retirement, weddings, children’s education, etc; so it is better that you move up your spending on saving and investment and reduce your spending on your wants. Let’s take an example if your after-tax income is Rs 20,000 then you can spend Rs 4,000, 20% of Rs 20,000, or even more on but it is better to spend more in saving and investment than wants.