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The 50/30/20 rule provides a plan to budget your after-tax income into different spending buckets. How do you plan your expenditure?

The 50/30/20 rule is a budgeting method that can help you allocate your subspace financial resources among your multiple competing needs. In her book All Your Worth: An Ultimate Lifetime Money Plan," Senator Elizabeth Warren in the US provides a rule of thumb method for budgeting our financial needs. She advises us to divide our post-tax income into three buckets.

We all have limited financial resources and multiple avenues to spend them. So, how do we allocate our scarce financial resources among our multiple competing needs? We need to fall back on the 50/30/20 rule of financial budgeting and plan to achieve a measure of financial discipline in our lives.

Senator Elizabeth Warren recommends dividing your post-tax income into three buckets:

Needs or necessities (50%): These include all our basic needs and necessities—our must-have list of things. Our basic requirements of food, shelter, and clothing fall into this bucket. Our needs dominate our expenditure basket, and we cannot live without them. We need to pay our rent, water, electricity charges, etc. These are indispensable to us, and our demand for them is inelastic. They also take up a larger proportion of our budget allocation.
Wants (30%): Our wants are the second component of our consumption basket. Wants are those articles we can do without but would love to have. It may be the latest iPhone, gadget, a foreign trip to a place we have always wanted to visit, or the latest car; the list is endless. Most of the wants are expensive and require a lot of funds. We can fulfill some of our wants but not all. We have to allocate our scarce resources to satisfy our wants frugally.
Savings (20%): Last but the most important component of our budget is our savings component which facilitates financial planning. This will be the mainstay of our retirement years and will enable us to live with dignity without looking for handouts from anyone. These financial savings will greatly help us to be self-sustaining. It helps us take care of our needs in our waning years and remain self-reliant. In our younger years, filled with the joy and exuberance of our youth, we do not like to think of old age and financial planning for that period.

An ultimate lifetime plan provides us with a ready-made solution.

Here are some tips for using the 50/30/20 rule with subspace:

Set up three subspace accounts: One for needs, one for wants, and one for savings.
Transfer 50% of your after-tax income into your needs account. This will cover your essential expenses, such as rent, food, and transportation.
Transfer 30% of your after-tax income into your wants account. This is where you can spend money on discretionary items, such as entertainment and travel.
Transfer 20% of your after-tax income into your savings account. This money can be used for future goals, such as retirement or a down payment on a house.

You can adjust the percentages in each category to fit your individual needs and goals. For example, if you have a lot of debt, you may want to allocate more money to your savings account to pay it off faster. Or, if you have a large family, you may want to allocate more money to your needs account to cover your expenses.

The most important thing is to be consistent with your budgeting and stick to your plan as much as possible. By following the 50/30/20 rule, you can achieve your financial goals and live a more balanced life.

How to prepare your subspace financial budget for your post-tax income:

Allocate 50% of your post-tax income for your needs or necessities. This includes essential expenses such as rent, food, and transportation.
Allocate 30% for your wants that you would like to acquire. This is where you can spend money on discretionary items, such as entertainment and travel.
Above all, do not forget the 20% allocation to your savings to create a robust subspace financial savings plan. Many of you also hold mortgages or debt, whether in the form of a no-cost EMI or some other form. This leaves a debt overhang which also needs to be paid off.

Example of a subspace 50/30/20 budget rule:

Let's say you have a monthly income of Rs. 50,000 per month, which has to be allocated according to the 50:30:20 budget rule.

Needs Bucket: You allocate Rs. 25,000 to meet the expenses of all the household needs. This amount is segregated to meet all your expenses on grocery and provision bills, your electricity and house rent, and your daily travel expenses. This amount goes to buying the absolute necessities for maintaining your life. There is nothing in this basket that you can ignore or do away with. These are the expenses you will incur to maintain a minimum standard of living.
Wants Bucket: The amount allocated to the wants bucket is Rs. 15,000. This portion of your income is meant to meet all your aspirational needs. When you are young, you hanker after many expensive acquisitions, including fancy watches, phones, cars, and expensive holidays. You must create a shortlist and prioritize these purchases. Above all, do not fall into the debt traps of zero-cost EMIs and personal loans for satisfying your wants. After all, you can forgo some of these purchases or defer them until the time your financial position facilitates their purchases. You should be able to distinguish whether you can survive without buying these items. You need not follow your peers and emulate them in their costly purchases. Also, wants are never-ending. New items replace the older sought-after items on your wish list. You need to ask yourself whether you need to satisfy every single one of them. Remember, this is the list that you can easily cull whenever you are facing a financial crunch. You can always revisit this list whenever your financial position improves.
Savings Bucket: This is the most important bucket and is the mainstay of your old age. This ensures that you are independent in your old age and not dependent on your children. This will ensure that you have your own income stream which sustains your needs in your retirement life.

Where did the 50/30/20 rule come from?

The 50/30/20 rule was created by Senator Elizabeth Warren to help Americans who were struggling with debt. In July 2021, American credit card debt reached US $998.4 billion. This debt included mortgages, credit card payments, auto loans, and student loans.

Senator Warren said that by dividing your net after-tax income into three buckets, you can accumulate enough money in the savings bucket to pay off your debt or save for retirement. The savings component can be used to build your asset base, increase your net worth, and pay off your debts.

How to use the 50/30/20 budgeting rule with subspace:

This rule helps you develop financial discipline and carefully plan your spending habits. You need to shop or save within your budget, based on your financial constraints. You need to budget for all of your expenses, including necessities, wants, and savings—all within the limits of your after-tax income.

If you want to live a larger-than-life lifestyle, you risk falling into a debt trap. If you don't pay back the debt you've incurred, you'll subject yourself to unnecessary stress and headaches. Before buying anything, ask yourself, "Do I need this product?" "Can I still live a happy life without it?" This will eliminate half of your wants. Alternatively, make a systematic plan to save money each month so you can eventually buy the things you want.

Necessities are required to meet your basic needs. They are essential for your survival. You cannot reduce or minimize this portion of your spending. Savings provide the financial resources you need to live in retirement and old age. Your life can improve if you can increase your contribution to this segment.

The only area where you can cut, reduce, or otherwise minimize your spending is in the "wants" category. Before you buy anything classified as a want, think three times. Wants are purely aspirational goods that enable you to keep up with the Joneses. Sometimes, after you buy something, you lose interest in it because a new want has captured your attention.

Is the 50/30/20 rule right for you?

The 50/30/20 rule is right for everyone, regardless of your income level. Even if you are just starting your career, you should start saving some portion of your after-tax income. Financial discipline and prudence with your income should start as early as possible. The earlier you start saving, the better your financial future will be. Through the power of compounding, regular savings can help you build your net worth and asset base. This is the path to wealth maximization in the long run. Avoid taking on unnecessary debt to buy expensive products that you may not need. This leads to the so-called zero-cost EMIs or loans with zero processing fees, which are not actually costless. For the temporary enjoyment of some wants, you are taking on the onerous responsibility of debt. Ideally, you can even allocate your post-tax income based on the following ratio: 50, 20, and 30. This means you increase your savings component by reducing the wants component. Such an allocation will help make your retirement years financially secure and your life independent.

50/30/20 rule compared to other budgeting methods

The 50/30/20 rule is a good starting point for budgeting, but it is important to remember that it is just a guideline. There is no one-size-fits-all budgeting method, and the best approach for you will depend on your individual circumstances.

One potential downside of the 50/30/20 rule is that it can be difficult for low-income people to follow. This is because the rule allocates a relatively large portion of income to needs (50%), which can make it difficult to save money. Additionally, the rule does not account for debt repayments, which can be a significant expense for many people.

If you are struggling to follow the 50/30/20 rule, there are a few other budgeting methods that you may want to consider. One popular alternative is the envelope system, where you allocate a specific amount of cash to each of your spending categories (needs, wants, and savings). Another option is the zero-based budget, where you assign every dollar of your income to a specific expense.

Ultimately, the best budgeting method for you is the one that you can stick to. Experiment with different methods and find one that works for you and your financial situation.

Other budgeting methods

80:20 rule:

Under this rule, you divide your income into two parts: 80% for spending and 20% for savings. This rule assumes that all of your spending needs, including necessities, luxuries, and other aspirational goods, are covered by the 80% of your income that is allocated to spending. The remaining 20% of your income is strictly allocated to savings, and you should not withdraw from this bucket for any reason. This is a simple and easy-to-understand rule. Any budgeting variances are typically not tracked.

70:20:10 rule:

Under this rule, you divide your income into three parts: 70% for monthly household expenses, 20% for debt payments (such as EMIs on your home mortgage, vehicle loan, or credit card debt), and 10% for savings.

You can adapt this rule to fit your needs. It is important to remember that whichever method you choose, building your savings and net worth is essential for long-term wealth maximization.

How to use these budgeting methods with subspace:

To use these budgeting methods with subspace, you can set up three subspace accounts: one for needs, one for wants, and one for savings. Then, you can transfer the appropriate amount of money into each account each month based on the budgeting method you are using.

For example, if you are using the 50/30/20 rule, you would transfer 50% of your after-tax income into your needs account, 30% into your wants account, and 20% into your savings account.

If you are using the 80:20 rule, you would transfer 80% of your after-tax income into your spending account and 20% into your savings account.

And if you are using the 70:20:10 rule, you would transfer 70% of your after-tax income into your needs account, 20% into your debt payments account, and 10% into your savings account.

Once you have transferred the money into your subspace accounts, you can use it to pay for your expenses, wants, and savings goals.

It is important to be consistent with your budgeting and stick to your plan as much as possible. By following a budget, you can achieve your financial goals and live a more balanced life.

Experts' opinions on the 50/30/20 rule

The 50/30/20 rule is not set in stone. It is just a guideline. At the beginning of your career, when you are earning a small income, the 50/30/20 rule may seem appropriate. But as you advance in your career and your salary increases, you will not spend all of your additional income on expenses. Expenses are not necessarily cut back and do not increase exponentially, even if you have a larger family. You do not need to spend all of your additional income on your wants. It makes more sense to increase the allocation to your savings component. For example, if you receive a large sum of money, it makes more sense to allocate this amount to your savings component. This is the only component that will grow exponentially. It ensures a financially secure and stress-free life for you in your retirement years without having to rely on others for financial assistance. With careful planning, a 50/30/20 allocation can even become a 40/20/40 allocation.

Key takeaways

The 50/30/20 rule teaches the importance of instilling financial discipline and prudence in your spending habits and savings habits. This rule, combined with a no-debt policy, is the best way to achieve financial freedom. Carefully plan your budget. Estimate your after-tax income and apply your spending thresholds. If you cannot satisfy a particular want, postpone that expense until the future. Creating budgets without guidelines or rules of thumb can seem like a complex process. Applying the 50/30/20 rule appears to be a relatively simple solution. There are some areas where you cannot neatly classify all of your expenditures into these three buckets. With experience, you will be able to analyze and classify expenses. After applying the 50/30/20 rule, you should carefully examine whether you are adhering to your spending thresholds. Even though it may seem like an extra task, doing so in a disciplined manner will ensure that you do not stray from the path and lose financial discipline.

Frequently Asked Questions (FAQs)

1. How do I take care of my indebtedness under the 50/30/20 rule?

Normally, debts, including credit card debt, are paid out of the savings portion of your budget.

2. How much do I spend under the 50/30/20 rule?

Normally, you should ensure that after saving 20% of your after-tax income, you spend the rest of your income on necessities and wants. If you are carrying debt, a portion of your savings portion will go to paying off your debt. If you have a lot of debt, you may need to cut back on your expenses in order to pay it off.

3. Is it necessary for me to rigorously monitor my expenses?

Yes, you should rigorously monitor your expenses.

4. Is 50/30/20 a hard and fast rule?

No, 50/30/20 is just a guideline or rule of thumb to help you better plan your financial future and achieve your wealth maximization goals.

50/30/20 Rule Of Thumb for Budgeting