A Smart Way to Control Expenses and Increase Savings

Rule of 50:30:20; A Smart Way to Control Expenses and Increase Savings

Consider an individual, Mr. Anand, who wants to save more from his income but doesn’t have a proper budget in place; without an efficient budget, he ends up spending more and saves significantly less, to solve this problem, the rule of 50:30:20 was introduced to him by his friend. This rule equipped him with complete control of his expenses and increased his savings.

50:30:20 rule not only helps in controlling the expenses but also helps in segregating the expenses between needs & wants and gives a precise idea in quantifying your savings for achieving long-term financial goals.

Let’s check out the modern thumb rule of budgeting introduced by Elizabeth Warren.

Rule of 50:30:20; The Split among Needs, Wants, and Savings

According to the rule of 50:30:20, an individual’s after-tax income should be spent in such a way that 50% of the income should be spent on their needs, where needs are expenses that cannot be avoided. 30% of the income should be spent on their wants, where wants are the expenses that can be avoided. 20% of the income should go towards savings, where savings should be invested.

Examples of needs, wants, and savings are as follows

An Illustration:

Suppose Mr. Anand’s monthly income is Rs.1,00,000/-, then by implementing the 50:30:20 rule, his budget will be as follows:

Needs: As these are unavoidable expenses, as per the rule, 50% of the income is allocated towards the “needs” i.e., Rs.50,000/-.

If Mr. Anand’s expenses for needs are below the 50% limit, then he can divert those funds to investments, but if expenses for needs are above 50%, then lifestyle changes are recommended.

Wants: As per the rule, 30% of income is allocated towards an individual’s “wants,” i.e., Rs.30,000/-. Suppose Mr. Anand wants to buy a new phone worth Rs.50,000/-, but it costs more than the allocated 30% limit. Thus, when the 50:30:20 rule is followed, he gets reminded that he is going to cross the allocated 30% towards wants.

In this scenario, when we are committed to following the rule. Instead of purchasing the smartphone straight away, we may think about other options like postponing the purchase to next month or checking for another model available at a price that fits our budget, etc.

Savings: As per the rule, 20% of the income should be allocated for savings, i.e., Rs.20,000/-. Based on the individual risk profile, he/she should choose their saving schemes ranging from recurring deposits to direct equities.

Thus, Mr. Anand successfully created his budget and started saving.

Budgeting your finances in line with your financial goals can help you further in achieving them and we at ATS can help you make your investment planning easier.

For further queries regarding investment planning and guidance, please call us at +91 7305923322 reach us at research@adityatrading.com

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