50 30 20 rule

5paisa Research Team Date: 19 Apr, 2023 03:51 PM IST


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People often say, “I've barely got any money left by the 15th of the month.” Consequently, they struggle to cover their necessary expenses and may even have to dip into their savings or take on additional debt to make ends meet. 

To avoid this situation, creating a budget that aligns with the 50-30-20 rule and sticking to it helps you manage your finances better. Following this rule, you can ensure you have enough money to cover your essential expenses, enjoy some discretionary spending, and save for your future. Let’s understand what is 50-30-20 rule is by decoding it.

Decoding the Rule

The 50-30-20 rule is a budgeting principle that suggests allocating your income into three broad categories: Needs, Wants, and Savings.

The 50-30-20 rule suggests spending 50% of your income on your essential needs, 30% on your discretionary wants, and saving the remaining 20% for future goals or debt repayment. A 50-30-20 budget can help you balance your expenses, maintain a healthy lifestyle, and reach your long-term financial goals

Breaking the 50-30-20 Proportion

●    Needs: 50%

The 50-30-20 rule states that the 50% allocation towards needs refers to the essential expenses for survival and well-being. It is important to prioritise these expenses as they are necessary for your daily survival. Here are some examples of needs that fall under the 50% category.

1.    Housing: This includes your rent or mortgage payment, property taxes, homeowners insurance, and any necessary repairs or maintenance.
2.    Utilities: It includes paying for electricity, gas, water, and other utilities to keep your home running.
3.    Food: To buy groceries and other household items like toiletries and cleaning supplies.
4.    Transportation: This includes your car payment or public transportation expenses, as well as gas, maintenance, and insurance costs.
5.    Health care: Paying for health insurance premiums, co-pays, and deductibles, as well as prescription medications and other health-related expenses.
6.    Basic clothing: To buy appropriate clothes for work, school, or other activities.
7.    Childcare: If you have children, you may spend on daycare or other childcare expenses.

8.    Personal finance: This includes expenses such as debt payments, taxes, and insurance.

It is important to prioritise your needs and ensure you have enough money to cover them. In certain situations, reducing your spending on needs may be necessary. You could move to a more affordable neighbourhood, cut back on eating out, or switch to a cheaper mode of transportation. Another option is to negotiate with service providers to get a better deal.

Tracking your expenses and ensuring you do not overspend in this category is essential. Maintaining a balanced budget can help you avoid debt and ensure you have enough money to cover your fundamental expenses.

●    Wants: 30%

In the 50-30-20 rule, the 30% allocation towards wants refers to discretionary expenses that are not essential for survival but can significantly improve your quality of life. Here are some examples of wants that fall under the 30% category.

1.    Entertainment: This includes going to movies, concerts, or sporting events, as well as streaming services like Netflix or Hulu.
2.    Dining out: You can spend money eating at restaurants, cafes, or fast-food outlets or order takeout or delivery.
3.    Travel: You can use your money to plan vacations, trips, or weekend getaways.
4.    Hobbies: You can pursue your interests or hobbies by buying equipment or paying for classes or lessons.
5.    Shopping: You can buy clothes, electronics, gadgets, or other items you desire but don't necessarily need.
6.    Gifts: You can spend money on buying gifts for your friends, family, or loved ones.
7.    Home decor: You can use your money to decorate your home, buy furniture, or upgrade appliances.
8.    Personal grooming: It includes expenses such as haircuts, manicures, and facials.
It is important to note that wants are not specifically unnecessary or wasteful expenses. They can help you enjoy life, reduce stress, and improve your mental health. However, it is easy to overspend in this category and neglect your savings and essential expenses.

To avoid this, it is essential to prioritise your wants and spend money only on things that bring you joy and fulfilment. Here are some pointers for managing your desires.

●    Set a budget: Limit how much you can spend on your wants each month. It can help you avoid overspending and prioritise your expenses.
●    Find cheaper alternatives: You can find affordable options for dining out, shopping, or entertainment, such as happy hour deals, coupon codes, or free events.
●    Focus on experiences, not things: Instead of buying expensive material items, consider investing in experiences that create memories, such as travelling or attending concerts or events.
●    Avoid impulse purchases: Before making a purchase, consider if you need it and if it fits your budget.
●    Track your spending: Keep a record of your expenses and review them regularly to ensure that you stay within your budget and do not overspend.

●    Savings: 20%

Per the 50-30-20 rule, the 20% allocation towards savings is essential for achieving your financial goals, such as building an emergency fund, paying off debt, and investing for the future. Here are some examples of savings that fall under the 20% category.

1.    Emergency fund: It is essential to have a savings account that can cover unexpected expenses such as medical bills, car repairs, or job loss. Experts recommend having at least a reserve of three to six months' worth of costs set up.
2.    Retirement savings: You can contribute to a 401(k), IRA, or other retirement accounts to save for your future. It is vital to start saving for retirement early and regularly contribute to leverage compound interest.
3.    Debt repayment: If you have any outstanding debts, such as credit cards or student loans, you can use your savings to pay them off faster and save on interest charges.
4.    Short-term goals: You can save for short-term goals such as a down payment on an apartment, a car purchase, or a vacation.
5.    Long-term goals: You can save for long-term goals such as starting a business, paying for your child's education, or buying a second home.
6.    Investment: You can invest your savings in stocks, mutual funds, or other financial instruments to earn higher returns than traditional savings accounts.
7.    Tax payments: You can use your savings to pay your income or property taxes.
However, This category is often overlooked but is essential for achieving financial security and building wealth over time. Prioritising your savings and striking the appropriate balance between short-term and long-term objectives is crucial. The following are some suggestions for effectively managing your savings.

    Automate your savings: One way to guarantee regular savings is to automatically transfer your checking account to your savings or retirement account.
●    Track your progress: Keep track of your savings goals and celebrate milestones.
●    Reduce expenses: Reduce your spending by cutting back on dining out or subscription services to free up more money for savings.
●    Maximise your returns: Consider using a high-yield savings account or investing in stocks or mutual funds to earn higher returns on your savings.
●    Use an investment platform: Consider using a platform like 5paisa to help manage your savings more effectively. 5paisa offers a variety of investment options, including stocks, mutual funds, and gold, and provides tools and resources to help you make informed investment decisions. With its user-friendly interface, 5paisa can be an excellent choice for those looking to maximise their savings and investment returns.

How to Apply the 50/30/20 Rule?

The 50-30-20 rule is a basic but practical budgeting guideline that suggests maintaining a healthy financial balance. The 50-30-20 rule can be applied using the following steps.

●    Step 1: Calculate your after-tax income: To apply the 50-30-20 rule, you must know how much money you have after taxes. 
●    Step 2: Determine your needs: Calculate your necessary expenses, such as housing, utilities, groceries, transportation, and healthcare. They should take up 50% of your income.
●    Step 3: Determine your wants: Calculate your discretionary expenses such as dining out, entertainment, hobbies, and vacations. These expenses you enjoy but are not necessary for survival and should take up 30% of your income.
●    Step 4: Determine your savings: Allocate 20% of your income towards savings. It includes emergency funds, retirement savings, debt repayment, short-term and long-term goals, and investments.
●    Step 5: Monitor your spending: Once you have determined your budget, it is essential to monitor your spending and ensure that you are sticking to it. You can use budgeting apps, spreadsheets, or pen and paper to track your spending.
●    Step 6: Adjust your budget: If you spot that you are overspending in one category, such as wants, you may need to adjust your budget to ensure that you stay on track.
Although, the key to success with the 50-30-20 rule is to stay committed to your budget, track your spending, and make adjustments as needed. By being mindful of your finances and taking a proactive approach to your money, the future of your finances can be in your hands, and you can accomplish your goals.

Example of the 50/30/20 Rule of Thumb

The 50/30/20 rule of thumb helps you achieve financial stability and balance. This rule suggests that individuals should allocate their after-tax income in the following way:

1.    50% of the earnings should be used for essential expenses such as housing, utilities, groceries, transportation, and healthcare.
2.    30% of the income should be used for discretionary spending such as entertainment, dining out, and shopping.
3.    20% of the income should be saved or invested in long-term financial goals such as retirement, emergency fund, or debt repayment.
To illustrate this rule, let's consider the example of Sarah, who earns a monthly income of Rs 40,000 after taxes. According to the 50/30/20 practice, Sarah should allocate her earnings as follows.
1.    50% of her income, or Rs. 20,000, should go toward fundamental expenses such as rent, utilities, groceries, transportation, and healthcare.
2.    30% of her income, or Rs 12,000, can be used for discretionary spending such as dining out, entertainment, and shopping.
3.    20% of her income, or Rs. 8000, should be saved or invested for long-term financial goals such as retirement, emergency fund, or debt repayment.

By following this rule, Sarah can ensure that she is living within her means, avoiding debt, and saving for her future. She can further adjust her spending and saving habits depending on her financial goals, priorities, and circumstances. For example, if she wants to save more for retirement, she can increase her savings rate to 25% or 30% and reduce her discretionary spending accordingly. On the other hand, if she wants to travel or buy a new car, she can temporarily increase her discretionary spending to 40% or 50% and adjust her savings accordingly.


Whether in the early stages of financial planning or seeking to advance your financial management, the 50-30-20 budget can be an excellent tool to help you achieve financial balance and stability. 

Additionally, if you're looking to pay off debt, save for retirement, or achieve your dream of owning a home or starting a business, the 50-30-20 rule allows you to get there. And with the help of platforms like 5paisa, you can maximise your savings and investments, making your money work harder. 

So, apply the 50-30-20 rule today and take the first step towards achieving your financial dreams!

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Frequently Asked Questions

The advantages of the 50-30-20 rule of budgeting are that it provides a simple framework for managing finances, helps prioritise needs and wants, and promotes regular savings.

Yes, the 50-30-20 budget can be a great starting point for anyone looking to manage their finances effectively and prioritise their needs, wants, and savings.

Credit card debt is considered a part of the "needs" category in the 50-30-20 rule, which should not exceed 50% of your total income.