You must have seen your parents keeping track of all their purchases and other expenditures in a notebook. And if you have started working recently, managing your money may be harder than cracking the job interview. However, budgeting is essential as you can properly plan your expenses and it will make sure that you are not cash strapped at the end of the month.
One of the basic rules of budgeting is the 50/30/20 rule. It is one of the easiest ways to start budgeting. Calculating the expenses into different heads can be confusing. This rule clubs the various expenditure heads into three broad categories: needs, wants and saving.
The first step in this process is to know your post-tax income. You can easily find that out in your salary slip. Include other deductions from your salary such as EPF contributions and health insurance in your budget.
According to the 50/30/20 rule, 50% of the post-tax income should be allocated for your needs, 30% towards your wants and 20% should be saved.
Now, let’s go through these categories.
The needs category can be said as the ‘Roti Kapada Aur Makaan’ category. It constitutes the essentials. Things that are important to earn money are also included in this segment. It includes rent, electricity bills, insurance premiums, minimum balance payment on your credit card. The minimum balance payment on your credit card or your monthly EMIs is a need as your credit score will adversely be affected if you don’t pay the minimum dues on time.
While the needs category takes care of the survival aspect, but it is the ‘wants category’ that makes life beautiful. The difference between wants and needs may be a bit hazy. To decide whether an expense is a need or want is to ask whether you could defer it for a month or so without any impact. If you can postpone it without any effect, it is a want. Eating out, watching movies on the big screen and going on vacations, come under this category.
Saving and Investment:
Saving and investment are essential parts of the budget. Think of this category as a ‘for a better future’ category. It is because the amount of money that you save and invest will help you to achieve your short term and long term financial goals. Whether it is putting your money in a different saving account, keeping in a recurring deposit, fixed deposit, or investing in mutual funds or direct equities, you need to earmark at least 20% of your income for your goals. This 20% can also include the amount that you are saving for emergency purpose. One of the best ways to save and invest is to automate. After calculating the 20% of the income, open an RD or invest in mutual funds through the systematic investment plan(SIP). The total of which should be 20% of your income.
So, these were the three broad expense heads. The proportion of income that you would spend in these categories will be different. If you are staying alone in a big city, the percentage of income spent on needs may be much more than 50%. In another scenario, if you are earning well and have fewer financial responsibilities, then you can save a higher percentage of your income. You need to remember that these are just basic guidelines, and you can always tweak it according to your convenience.