50/30/20 Budgeting Rule in Stocks – The Ultimate Budgeting Rule to Bring Financial Stability

Budgeting and managing finances are two terms that go hand-in-hand. However, not every one of us manages to keep it in our grasp. The result?Overspending and an unstable financial outcome. Thankfully, things do not need to be that way as you can easily track and maintain your expenses well within the budgeted range with a simple budgeting method. The method, of course, is the 50/30/20 budgeting rule popularized by Elizabeth Warren.

Budgeting helps people to manage their finances well and be in line with their finances. But the caveat around budgeting is that without a proper strategy, it will not yield proper results.

• Make Realistic Budget This budget rule helps to create a realistic and practical budget that can help you effectively in your budgeting and finance. The 50/30/20 rule is not too strict nor is too lenient and incorporates all the necessary expenses along with ample space for a few wants and desires. This gives it a balanced look and gives you higher chances of succeeding at budgeting your expenses.
• Avoid Overspending The 50/30/20 rule is known to stop overspending by creating a practical budgeting rule. It helps you keep track of the expenses and maintain your indulgence to the limit as exercised by your budget.
• Promote Savings One of the major roles of this rule is to promote savings among people. Savings are a vital part of human life as they can come in handy for emergencies or help achieve goals in the long run. Many of us, awed by the daily life and glittery world splurge more and forget about the savings. This rule helps keep a designated 20% of your income as savings for future needs.

The 50/30/20 rule is a simple yet smart monthly budgeting rule that allows you to allocate your income into different fields, giving you a clear big-picture of your finances for the month. The system works in a simple way where you simply divide your after-tax income into three different fields as needs, wants, and savings. Let’s take a look at how the 50/30/20 rule looks like with the help of an example. Let’s say your income is 1,00,000 per month after tax.

• Separate 50% of Your Income for Needs: The first rule of the thumb is to separate 50% of your post-tax income for essential needs. The essentials need to cover the expenses like rent, electricity and water bills, loans and EMIs, groceries and household expenses, and more. Try to incorporate your expenses well within the bracket of 50%. If certain things escalate your percentage to the north of 50% then look to lower the use or change the supplier to see it can be balanced. For instance, lower your rent payments by switching your house.
• Separate 30% of Your Income for Wants: Whilst 50% of the income is catered towards the essential and basic needs, the next 30% is to be bifurcated for non-essential needs. This includes activities like going out for movies or dinner, membership for gyms, print, and media, subscriptions, shopping, and holidays. These activities are those which can be avoided if required and doesn’t necessarily affect your core lifestyle if you don’t indulge in them.
• Last 20% for Savings: The final portion from the after-tax income, i.e. the remaining 20% should form part of your savings. This can go into your savings account or investment schemes. This can help you maintain an emergency fund for future usage or build a corpus to fulfil any goals in later years.

Using the 50/30/20 rule is easy enough and doesn’t require any rocket science for the matter. All you need to do is follow these below-mentioned steps:

• Step 1: Calculate Your Net Income After Tax The first step involves computing your total income and tax liability. Just deduct the amount of tax from your total income to find out the net income available for budgeting. If you have an income of Rs 1,00,000 pre-tax and are subject to a tax of 10%, your net income should come around Rs 90,000.
• Step 2: Track Down Your Expenses and Categorize Them The next step is to track down all your expenses and spending of the last month as this will form the base of your planning. Once you have enlisted all your expenses and categorized them accordingly, you'll have a clearer picture of your finance. Look for separate the expenses into the category of essential needs, wants, and savings. This will come in handy for the next step.
• Step 3: Set Your Budget According to the 50/30/20 Rule The final step in the process is to separate your net income after tax according to the budgeting rule of 50/30/20. You can separate the amount for these three categories, i.e. needs, wants, and savings. Since you already have an idea of your spending based on last month's expense tracking, you can plan well for your budget.
• Step 4: Maintain Your Expenses This one is as important as the other three aforementioned above. Since you already have the budget rule and the desired amount separated, it is time to put it into use. Look to spend well within the budgeted amount for your expenses to comply with the rule. If you feel that the expenses are not in line with the rule, take a firm stand and lower your expenses.You can simply ask yourself questions like whether you need the subscription of those print and media or the cable network, or do you need to go out for movies every weekend. These are the little caveats that tend to spike the budget. Look to master them, and you'll have succeeded in maintaining your budget rule.

The 50/30/20 rule helps to balance your financial situation by keeping you on track within the budget. It's a great way to keep your expenses well within reach so that you don't end up over splurging the money while also not compromising on your lifestyle.

The information contained herein is generic in nature and is meant for educational purposes only. Nothing here is to be construed as an investment or financial or taxation advice nor to be considered as an invitation or solicitation or advertisement for any financial product. Readers are advised to exercise discretion and should seek independent professional advice prior to making any investment decision in relation to any financial product. Aditya Birla Capital Group is not liable for any decision arising out of the use of this information.