My childhood was very comfortable, my parents made sure we had everything we need to grow up well. But I know how difficult sometimes it was for them to be able to provide. For our family, financial situation always had crests and troughs. In the end, everything turned out to be good as my parents planned well. Having them as my inspiration all my life, I learned a lot about the importance of being financially strong to lead a happy life and provide the same for our loved ones.
I will be posting one post every month that can help everyone have a better relationship with money. This is the first of the series and I will be talking about the 50/20/30 rule.
Before I explain about the rule, there is one thing I would like to stress about – having a monthly budget. If you already have one, great. If not, please please please start preparing one right away. It doesn’t have to be perfect, just start and keep making improvements over time. Having a budget is the first step of financial planning. If you don’t think it is important to you, think about people who are depending on you – do it for them.
The 50/20/30 Rule:
This rule says allocate 50% of your income towards necessities, 20% to financial goals, and 30% to lifestyle.
How it works:
First, note down all your income sources (could be regular, or one-off). If you are working part-time and/or get paid hourly, an estimate of the income amount is fine. Once you have all the sources and respective numbers noted down, calculate the grand total.
From the grand total, allocate 50% towards necessities such as rent or mortgage payments, food, transportation, loan payments, emergency fund savings, and tuition (if applicable).
Allocate the next 20% for financial goals that include – long term savings, debt payments, short term savings for vacations etc.
The final 30% of the total should be allocated to lifestyle choices such as clothing, shopping, entertainment, hobbies etc. Keep in mind, you don’t have to spend all 30% on these things just because you allocated the amount. Most of the times you might not need to spend everything. In such cases move such funds into the savings budget, you will thank yourself later.
This technique by itself might not make you financially stronger but will help you kick-start the process. Having a budget and sticking to it will help you develop financial consciousness and avoid spending money on unnecessary purchases.
Hope this post helps you launch your financial planning.