Wallet

What is the 50/30/20 budgeting rule?

Akshata KamathNovember 8, 2022 | 13:29 IST

Though budgeting may look easy, executing the budget is a bit harder. The typical age-old 50/30/20 budgeting rule was created to make peoples' live easier. It suggests that the ideal way of proportioning your post-tax income is to utilise your monthly income in this ratio:

1. 50% of your income should cover your ''mahine ke kharcha''. That is you should spend 50% of your income on your needs and normal expenses ie EMIs, rent expenses, food, electricity bills etc. 
2. 30% of your income should go towards ''aish'' - ie Spend 20% of your income on your wants like luxury vacations, club memberships, designer clothes, partying, travel, fancy furniture, hobbies etc.
3. 20% of your income should go towards your ''bachat'' ie. cash savings, emergency funds, retirement funds, etc. 

But why do people use this today? You know when they say: ''Having some plan is better than having no plan at all!''? This 50/30/20 budget rule was that basic plan which is great to follow when you are getting started and figuring out what to do with your income. Since this has been a traditional budget rule that has been historically recommended in case you don't have a plan, many followed this as a basic rule. 

But does this really work? Not really. Here's why: 
1. If you strictly follow this budget, you will keep allocating the same proportion of your income no matter what your financial situation is like. For eg: If you are a student and have no liabilities, you don't need to spend on your ''luxuries''. But since the budget will encourage you to spend and there is no incentive for you to save or invest, you will actually end up spending money unnecessarily. You have to be able to change your budget depending on where you are financially.
2. It does not focus on your goals or progress. If your goal is to be debt free in the next 1 year and you decide to not update your budget accordingly, you take the risk of not achieving your debt-free goal. Similarly, if you have debt and have no savings, your budget will first accommodate and save some emergency funds. Once that is set, you will cut down on ''wants'' and prioritise repaying debt.
3. The budget does not mention giving or contribution in any way.
4. Though it is important to spend on ourselves, sometimes focussing too much on wants keeps us in a paycheck-to-paycheck cycle.

So how do we make our budgets flexible for us? Your budgets should help you thrive and not just survive. So feel free to be flexible with these basic budget rules. Here are some ideas about how your budgets can work for you: 
1. The updated 50/30/20 rule - Since Millenials or Gen Zs don't have as many financial responsibilities as people elder to them, they can split their incomes in this ratio:

  • 50% towards all kinds of expenses 
  • 30% towards investments and 
  • 20% toward savings 

2. The 75/15/10 rule: For someone who has financial responsibilities or is say between the age of 30-60, living off 50% of your income may not be a possibility. So here is another budget people can follow: 

  • 75% of your income will cover all expenses 
  • 15% of your income will go towards investments
  • 10% of your income has to be saved. 

The idea is to invest more money than save in cash because investments will grow and bring you more money. Since these ratios are maximums and not requirements, you can change your budgets as per your financial goals.  

Last updated: November 08, 2022 | 13:29
IN THIS STORY
    Read more!
    Recommended Stories