We constantly read about the benefits of investment plans and mutual funds, but when savings are zero, this knowledge is wasted! In reality, saving isn’t a difficult task; it’s simply a plan. All you need to do is smartly manage your salary and essential expenses. Divide your income in a way that effectively meets both your needs and your essential investments. Today, we’ll explain in detail the simplest, most popular, and most effective financial planning rule: the 50-30-20 rule, which will help you achieve disciplined monthly savings.
The 50-30-20 Rule
Many principles exist for saving, but the 50-30-20 rule is extremely popular due to its simplicity and exceptional effectiveness. This rule emphasizes dividing your total monthly income into three key categories to achieve an optimal balance between needs and savings.
Strategic Income Division
This rule simply advises you to divide your entire salary in a fixed ratio of 50%-30%-20%:
50% for Essential Needs
Set aside the largest portion of your salary, i.e., 50%, for all basic and essential expenses such as house rent, loan EMIs, groceries, electricity bills, children’s school fees, and insurance premiums. This is the portion that’s hard to cut because it covers your basic responsibilities.
30% for Personal Wants
This portion is for your desires and entertainment, which are essential for maintaining happiness and motivation in life. You can use this 30% for entertainment (OTT Subscriptions), travel, buying a new gadget, eating out, or pursuing your favorite hobbies. This portion gives you the freedom to enjoy life while still maintaining financial discipline.
20% for Savings and Investments
This is the most important portion and lays the foundation for your future. Be sure to immediately set aside 20% of your salary for savings and long-term investments without fail. This amount completely secures your financial future, whether it’s retirement or larger goals.
Applying the 50-30-20 Rule with an Example
To understand this powerful financial rule, let’s consider a concrete example so you can directly apply it to your monthly income.
Income Analysis: ₹30,000 Monthly Salary
Suppose a person’s total monthly salary is ₹30,000. According to the 50-30-20 rule, the practical breakdown would be as follows:
- 50% (₹15,000): Spending on essential needs
- 30% (₹9,000): Spend on desires and hobbies.
- 20% (₹6,000): Savings and investments.
You can also invest this ₹6,000 savings smartly. For example, invest ₹3,000 in a growth-oriented platform like a mutual fund, while the remaining ₹3,000 can be invested in a safe platform like a fixed deposit (FD) or Public Provident Fund (PPF).
You can also vary the ratio of 30% (desires) and 20% (savings) based on your personal preferences. For example, if you want to save faster, you can spend 30% on savings and 20% on desires. This unprecedented flexibility is what makes this rule so effective. It eliminates financial worries and paves a strong path to financial success.