“It’s not your salary that makes you rich, it’s your spending habits,” declared Charles A. Jaffe—a renowned author who is still alive and kicking at the age of 121. This makes perfect sense to sensible people. Inculcating a healthy spending habit calls for a reliable budgeting system. The Budget Rule of 50/30/20 is widely accepted as one of the best ways of budgeting for family expenses.
The 50/30/20 Budget Rule suggests deployment of our earnings under three heads for a balanced approach. It talks of needs, wants and savings. The whole idea is to cater to all our needs without becoming insolvent in the process.
A salaried person usually spends a huge chunk of one’s income on basic needs. These are payments of a recurring nature and cannot usually be avoided. These include rent for accommodation; electricity, water, telephone bills, etc.; expenses on food, transport etc. The suggested budget for these is about 50% of the salary. There is little scope for cutting down on these expenses. Some of these expenses may be postponed and paid at a later date with penalty or interest. But these expenses cannot be done away with.
The recommended spending on wants which refers to comforts is 20% of the salary. These include watching movies and spending on other means of entertainment, eating out, spending on Gym or Spa, shopping and hobbies. These are expenses that can be curtailed to some extent in order to keep the budget for wants under the desired 30 percent. The best thing is to cut down on avoidable expenses under this category.
That leaves a balance of 20 percent. This is the most important bit. This amount should ideally be spent on maintaining a savings bank account or to repay loans, putting aside some money for educating the children, creating a contingency fund for emergencies, making investments for a secure retired life, and such other purposes.
If we take life seriously, we just have to be disciplined in our spending patterns. Otherwise, our retired life is going to be in a mess if we do not plan for it in a systematic manner. However, the 50/30/20 Budget Rule is a general guide to help you plan your monthly budget in such a way that you provide for non-recurring expenses during the year and also plan for your retirement in a sensible way.
The 50/30/20 budgeting is not a hard and fast rule. You can improvise on it to suit your personal and family requirements. If you can plan it in such a way that you are able to save more than 20 percent of your monthly income and make investments for your future, nothing like it. But the bottom line is that you must provide for all foreseeable and unforeseeable expenses while preparing your monthly budget.
