What is the 50-30-20 Budget Rule
- 50% of income (after tax deductions) should be spent on needs
- 30% should be spent on wants and
- 20% should be allocated to savings
So, how do you distinguish between needs and wants? Budget experts assert that a need lies in the eyes of the beholder, which synchronises with the economic concept of money management as well. For example, you “need” to consume food when you are hungry, whereas you just “want” it when you are asked for it.
Why The 50-30-20 Budget Rule Helps You Save More Money
Usually, we find ourselves driven by wants which are often the cause of our eventual over spending. When you realise that creating the potential to save can actually result in extra cash, you can discover how to operate on needs rather than the extravagant “wants”. By distinguishing between needs and wants, the 50-30-20 Budget Rule allows you to save money.
Practical Example to Save Using the 50-30-20 Rule
Cutting Down on Extravagant Grocery Bills – Extravagant grocery bills include purchasing mounds of confectionery sugar, cartons of milk, branded grain bread and juice of upscale variety. Such habits strongly indicate conspicuous consumption and impulse buying since the purchase of such products is meant for instant gratification. Making a few conscious changes, like switching to generic brands on grocery items, can help you save enough money to compensate on other areas where you find yourself falling short.
Keeping Your Utility Bills in Check – The air-conditioner, fans, lights and other appliances that you keep on for longer hours only increase your electricity bill. The same happens when you overuse/misuse microwaves, heaters, and other appliances that run on gas. Keep excessive lighting off and see how your bill drops drastically.
Paying Outstanding Debts on Time – Your debts are a major reason why you end up paying 20% of your savings in the name of interest payments. Avoid using credit cards if you feel you cannot use them responsibly. However, if you have no other choice, only opt for using your card when you are flat out of cash. Always remember to pay off your credit card debt as soon as the monthly bill arrives. It is really easy to ignore the inflating amount of debt as you pay off as little as possible per month to keep your card valid, because the interest rates credit card companies charge are usually higher than your debt.
Allan enjoys talking and obviously writing about saving money and frugality. Over the last 3 years Allan has contributed numerous articles to personal finance blogs and websites. Allan’s favourite topics include savings accounts reviews, budgeting tips and frugal strategies.