If you’ve just started earning or really need a hook to add discipline to your financial planning, the 50:30:20 rule is totally for you!
So what exactly is the 50:30:20 rule?
The 50:30:20 rule says that 50% of your income must be spent on needs, 30% on wants, while the remaining 20% must be utilised to build an emergency corpus.
NEEDS are those without which you cannot sustain your daily life. These are groceries, house rent or EMI, utilities, and so on. You can never compromise on needs, and you have no choice but to spend on them.
WANTS are those that are not absolutely necessary, but you are making use of them in order to make your life better. A few examples of these are gym membership, vacation, movie tickets, subscriptions to online streaming sites, and so on. It is advisable for anyone to limit their spending on wants as much as possible.
The remaining 20% of your income must be saved to build an EMERGENCY CORPUS which is at least thrice your monthly salary. One way to do this is to invest in Liquid Funds through monthly SIPs to build your emergency corpus. The best part about Liquid Funds are they can be instantly redeemable so there’s no worry about locking in your money for a fixed period.
If you are able to cut down on spending on WANTS, then you can utilise the same in increasing your mutual fund investments as well.
Share with us your most effective financial practices in the comments below.