With a steady rise in inflation and cost of living, a sufficient savings corpus and a control on one’s expenses becomes extremely important. The best way to kick-start is by setting up a budgeting rule.
A budgeting rule gives a good sense of where your salary is going. Having an idea about this also ensures you can cut down on all your superfluous and unnecessary expenditures. Once you visualize the inflows and outflows of your funds, you can then begin to make concerted efforts to bid goodbye to all those unplanned expensive fine dinings and online shopping. In the process, you will end up saving much more.
What is the 50/30/20 Budgeting Rule
The 50/30/20 budgeting rule is one of the best known ways to start a solid money management journey. It does not matter how much you earn. You can easily apply this rule and develop the much-needed financial discipline. Here’s how you can begin:
First, write down your total earnings. Be it from your full-time jobs, any freelancing gigs, or short-term projects, include them all. Let’s assume it comes down to INR 50,000.
Then, segregate this amount into three buckets of 50, 30, and 20.
50% Constitutes Your Needs
This comes to INR 25,000. You can fund all essential payments via this chunk. You should pay your rent, electricity, and other utility bills. These are imperative expenses intrinsic to your survival. Hence, they cannot be delayed at any cost.
In addition, you should also pay off all your loan installments, the minimum amount (at least) due on credit cards, and insurance premiums with this segment. Solidifying your financial health is important and, in fact, non-negotiable.
Hence, make sure you put aside enough money at the beginning to save you from the guilt of not having saved and invested enough! The idea is to pay off immediate, urgent obligations that will only pile up next month and cause a financial nightmare. Defaults on loan payments can badly damage your credit score. Not to mention that the total amount payable can quickly spiral out of control, thanks to skyrocketing interests.
P.S There is a world of difference between a need and a want. And in our overwhelming urge to get our hands on that phone or game, we often blur the boundaries. So, don’t attempt to pass off that Dune Collection as a need just because you love it. To distinguish between a need and want, the underlying question to ask is: Can you survive 10 days without it? If you can, the gratification of buying it can be deferred.
Most of us veil our Amazon and Nykaa shopping carts as a need and buy recklessly. One way to start budgeting and keep impulsive shopping in check is to wait. Try waiting three days before hitting “Checkout” on your cart. Chances are, you won’t even remember it. And if you will, the intervening time will weed out all unnecessary items.
30% Constitutes Your Wants
So, about INR 15,000. Let your hair down here! All your shopping, book collections, hobby classes, and solo trips can get a lease of life here. Think of this as your “Fun Fund”. The purpose of this fund is not just to survive but to thrive.
Given how our wants are never ending and always cropping up, it’s essential to cap them at some point. This might mean you find your Want fund seriously inadequate. The temptation of dipping into your savings to fund all these immediate desires will be super high. But desist.
Retail therapy is real but should not be employed per convenience. Your hard-earned money should give you a worthwhile experience. Shopping recklessly is an instant gateway to regret. Incorporate judiciousness in the way you shop and select. That will help you get only items you genuinely need.
If you’re looking to make an expensive purchase, like an I-phone, break it down. Don’t squander away an entire month of your want fund on just one purchase. Instead, regularly set aside a separate, smaller fund dedicated exclusively to this cause.
20% is Savings
INR 10,000—This should be devoted to your savings and investments. We are living through a pandemic in an era of expensive healthcare and job uncertainty. One visit to the hospital can drain you of all your funds. Hence, you must have enough stashed aside to ride over such times. Without a doubt, this is your most essential financial bucket.
Ideally, you should have emergency funds to cover all urgent, unforeseen expenses. This should have half a year’s worth of your average monthly expenditures. But remember, just savings is not enough since inflation is steadily eating into our money’s purchasing power. What is valued at INR 100 today will cost INR 150 tomorrow. Long-term, goal-based financial planning should be your aim to fund all your life’s major milestones.
For that, investing in inflation-beating avenues should be your top priority. With age on your side, you can consult a financial advisor and work on an investment basket that ensures optimal asset allocation to meet your short and long-term financial goals.
Read More:What The 50/30/20 Budgeting Rule Means