Money Matters: The 50-30-20 rule and how can it stretch your income

It’s fair to say that just because you have a regular income doesn’t mean that you’re spending your hard-earned money in the same methodical way each month, and I’d hazard a guess that there’s room for improvement when it comes to how you manage the money you earn through blood, sweat, and tears. 

Everybody has a different way of handling their money, but people like Securities and Exchange Board of India (SEBI) registered tax and investment expert Jitendra Solankii reckon you should be applying a 50-30-20 rule of budgeting and making sure your monthly income holds water. 

What is the 50-30-20 rule?  

According to Solankii, who spoke to Mint, the idea behind the 50-30-20 rule of budgeting your monthly income is based on the idea that 20% of your income should be allocated to savings, 50% for important and necessary expenses, and while 30% of the to those expenses that are important but not essential.

“50-30-20 rule of budgeting is quite popular in the US, Europe and other developed countries but it can be implemented in India too., she said. 

“After all, it helps an earning individual to decide how much he or she should be investing for its various needs. This 50-30-20 calculator advocates to devote 50 per cent of income for important and necessary expenses, 30 per cent for important but not necessary while 20 per cent for the savings.”

How to divide your money for maximum benefit  

According to Solanki, the following kind of expenses should be considered as part of the important and necessary expenses category: 

• Home budget, 
• Child school and tuition fee, 
• Loan EMIs.

Important but not necessary expenses include: 

• Weekend hangouts, 
• Watching movies with family, 
• Dining out with the family.

50-30-20 budget: How does it help?

Pankaj Mathpal, Founder & CEO at Optima Money Managers, told Mint that the guideline for spending your cash can benefit earning individuals in a number of ways. 

“When you have a devoted amount for investment to meet your various goals, then it’s for sure that you are putting money in all kinds of options meant for meeting your short-term, mid-term to long-term investment goals. So, the 50-30-20 calculator is useful in meeting all kinds of investment goals,” he said. 

“But, in current scenario, when one is saving good amount of money from one’s 30 per cent income due to the lockdown and COVID-19 restrictions, it’s better to divert that fund into the 20 per cent section.”

On how to use that surplus amount Pankaj Mathpal said that the COVID-19 pandemic has taught us “various social and financial lessons”. 

“From financial perspective, it has taught us to have ample amount in liquid form. If someone is able to save from the 30% section of one’s income, then it is advisable for him or her to create an emergency liquid corpus that can help him or her to survive for near one year even when he or she has no source of income. Once that liquid need is met, then one can decide as to which investment goal he or she would like to increase and decide on the basis of that requirement.”