What is the 50-20-30 Rule ?

Living on a budget can be tedious, painful and terrifying. But why does living on a budget terrify people? Maybe it is because whenever we think about living on a budget, the first thing that comes to our mind is saying goodbye to all the things which we like and enjoy.  

The main problem with living on a budget is nothing but our mindset, which focuses more on the negatives rather than the positives of living within a budget. Also, there are techniques of living on a budget while still enjoying the good things in life, which many people living on a budget fail to do. What is there was a personal budgeting technique which would tell you to spend X amount of your income on the things you enjoy? Welcome to the 50-30-20 rule of personal budgeting. 

The 50-20-30 rule is a budget plan, which is perfect for people who wish to save money, spend responsibly while enjoying the finer things in life. It merely tells us how much to allocate for living expenses, entertainment and savings. 

How does the 50-30-20 Budget Plan Work 

The 50-30-20 rule is a budget plan which was popularised by an American mother-daughter duo, former U.S. Senator Elizabeth Warren, also a bankruptcy expert, and her daughter, Amelia Warren Tyagi, a business executive. The co-authored a book titled “All Your Worth: The Ultimate Lifetime Money Plan.” The goal of the 50-30-20 rule is break-down your monthly net income and allocate a certain proportion of your income towards your essential living expenses, leisure and entertainment expense and savings. 

Essential Living Expenses – 50% 

The 50-30-20 rule allocates half of your net income to essential living expenses. These expenses include: 

• Rent or home loan EMIs for the place you live. 

• Utilities expenses such as electricity expenses, water bill, gas expenses to ensure non-stop supply to electricity, cooking gas and water at your residence. 

• Food expenses, cause you can’t live off the air. This includes buying your groceries, meats, fruits and vegetables. 

• Insurance payments which include your car or two-wheeler insurance, life insurance, health insurance, or any other form of insurance you might have taken to safeguard your assets and family’s future.  

• Phone, mobile and internet expenses. After all, we cannot survive without our highspeed internet. 

• Fuel expense or travelling expense to commute to and from work. 

• Credit Card and other Loan Repayments which can include personal loans or any other loans. Timely credit card payments are important as paying late payment fees and interest when you are living on a budget. 

• Other essential expenses which might be considered crucial such as education expenses, medicines, daycare expenses etc. Please note, the key word here is essential. 

Investments and Financial Goals – 20% 

The 50-30-20 rule focuses on improving your financial your financial health and creating wealth for your future. Being born poor might not be in your hand, but growing old rich is entirely in your hands. 

• It is essential to build a saving corpus to meet uncertain life events such as loss of employment, medical emergencies and expenses. These savings help you in meeting unplanned emergency expenses without breaking your bank account or need to borrow money from friends and family. As a thumb rule, one should save at least 3-6 months of their essential living expenses. 

• Once you have accumulated an adequate emergency expense fund, it time to invest a create wealth for your future. You can invest this 20% of your income in a wide array of investments such as SIP plans, mutual funds, debt funds, fixed deposits, recurring deposits and another form of investment plans and financial instruments. 

Personal Spending including Entertainment and Leisure – 30% 

Living on a budget does not mean living like a hermit and giving up all the things you like in life. Besides, everyone needs to have some fun every once in a while. While the 50-30-20 rule makes provisions for entertainment and leisure expenses and all the finer things in life, these expenses needed to incurred within a budget. These expenses can include: 

• Dining out with your family and friends. 

• Vacation, though some may consider it as a luxury, vacations are necessary to take a break from the monotonous routine of work and personal life. Besides, the lessons one can learn travelling cannot be learnt in any classroom or corporate job. 

• Shopping for some new clothes, shoes, home décor products. Though these are not essentials, they can enhance our moods and personalities, and after all, who does not want to look good and stand out in the crowd. However, do it within a budget.  

• Going out for movies and drinks can be essential for taking small breaks from the stress of work and life throws at you, but these expenses need to be budgeted responsibly. 

• Spending on some in-home entertainment options such as a Netflix or an Amazon Prime subscription can be a good idea when it comes to enjoying within a budget. After all, these services offer thousands of hours of content to binge watch and entertain yourself post work or on a lazy weekend. 

Some Tips for Successfully Implementing the 50-30-20 Rule 

Living on a budget does not mean compromising on the good things in life. As the saying goes, necessity is the mother of all invention. Similarly, budgets can be the father of all innovations. Here are some tips to living it large while on a budget: 

Tips for Spending on Essential  

While certain expenses such as home loan EMIs, rent and travelling costs might not be entirely in our hands, and switching our home loan, rented accommodation and changing your existing motor vehicle for a more fuel efficient one can involve substantial cost. Nonetheless, there are certain essential expenditures where we can save money while not compromising on our standard of living. 

• One can substantially save groceries cost by buying groceries from supermarket or online platforms which offer substantial discounts and economical rates when compared to your neighbourhood grocery shop. 

• For non-vegetarians, buying fresh meat from your local butcher can be much economical and ensure freshness as compared to buying frozen meat. 

• By reducing sugary and junk food from your diet, not only can you improve your health, but also have a healthy grocery bill. These zero nutrition-value high-sugar laden snacks often make a substantial portion of our grocery bills. 

• Utility bills such as electricity, water and gas expenses can be reduced by following using these resources efficiently, such as switching off lights when not in use, avoid wasting water, cooking on a low flame. 

• Insurance expenses can also be substantially saved by comparing multiple insurance plans a the time of renewal rather than simply renewing the insurance at its renewal price. 

Tips for Savings and Investments 

While savings and investments are essential to meet emergency expenses and creating wealth for the future, it is vital these offer us a high value and returns, while serving our financial goals. Here are some tips on how to maximise the value of your savings and investments. 

• Your 3-6 month saving corpus can be held in a highly liquid investment instrument such as a fixed deposit which can be liquidated at a moments notice. While this portion of your income is meant for emergencies and might not be dipped into or used frequently, it can earn you some interest income rather than lying idle, and inflation is eroding its value. 

• Another important thing about your saving corpus is to forget that you even have this money. It is best to pretend that this money is non-existent and should re-enter your memory only at the time of a genuine emergency. 

• While investing your savings in creating wealth is a healthy habit, it is essential to do your research before investing your hard-earned money in any financial instrument, mutual fund or investment plans. 

• For the financially-illiterate population, SIPs and mutual fund are the best options for investment in the long-term wealth creation. 

Tips for Personal Spending 

The 50-20-30 rule clearly states that it is important to spend on yourself and not live like a miser. But spending on a budget does not necessarily mean compromising on your personal spending; it encourages you to spend smart. Here are some tips to save money on your personal expense without compromising on the quality personal spending: 

• Watching movies during the weekdays can cost much more than watching a movie on the weekend when the ticket prices are highly inflated and expensive. Why spend more watching the same movie? 

• The best time to hit a bar is during happy hours when patrons are offered free drinks and an attractive discount. This way you can have the same amount of fun and end up spending much less. 

• Shopping during sales can save you a lot of money, which most brands offer between 40 to 70 per cent discount before launching their new product line for the next season. 

• Subscribing to a streaming service such as Netflix, Amazon Prime, HotStar can be much more cost effective than we think. With thousands of hours of entertainment content, you might not even need to go out, which in itself is a considerable cost saving and having a nice time while staying in a budget. 

The Verdict 

The 50-20-30 rule probably is one of the best budgeting techniques for individuals who want to save money, invest and have some fun at the same time. The 50-20-30 rule not only encourages you to have fun, but also motivates you to get innovative with your expenditure, think out of the box, and spend less for more. 

The 50-20-30 rule does not ask you to live like a hermit, but enjoy and spend with much more responsibility. 

Savart is a SEBI-registered investment advisor, founded by Sankarsh Chanda. The purpose of this content is to educate, not to advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.