DIY Financial Plan step 1:
Why 50-30-20 budgeting rule isn't enough?

Introduction

You must have heard about the 50-30-20 rule of budgeting! 

If not, let me tell you that this is the first step to managing your money and starting your financial planning. 

As soon as you start earning, you should start following this expense tracking rule, which says that:

• 50% of your income should be allocated towards essential expenses such as rent, utilities, and groceries. These are the basic necessities that you cannot function without.

• 30% of your income is for spending on YOURSELF! i.e. the expenses that bring joy and happiness to your life, such as dining out, entertainment, and vacations. This portion allows you to enjoy your hard-earned money guilt-free.

• Lastly, the remaining 20% of your income should be dedicated to savings & debt repayment. This includes keeping some money aside in case of any emergencies, paying off your debts like an education loan or simply investing it in any instrument!

This sounds like a plan! Then why did I say that it is not enough?

Because, as you grow in your career, you should start following the 30-30-30-10 rule of budgeting instead of 50-30-20!

The 30-30-30-10 budgeting rule

As you grow in your career, it makes more sense to divide your income in the following manner:

• 30% of your income should go into LIVING, which includes your rent, groceries, utilities, etc. Do your calculations, and make sure you do not exceed this cap while searching for that rented apartment.

• 30% of your income should go into your LIABILITIES, which includes your EMIs (home loan, car loan, education loan), and any responsibility of dependents or your parents. If you are taking any loan, make sure to not put more than 30% of your income as the monthly EMI.
  In case you have no liabilities of EMIs, or parents, great! Consider yourself blessed. Spend some on entertainment and invest the rest. You can easily invest 40-50% of your salary.

• 30% of your income should be contributed to your INVESTMENTS. Where to invest, what should be the strategies, and how should the asset allocation be? We will talk about this in our upcoming blogs!

• The remaining 10% should be spent towards your ENTERTAINMENT. This includes shopping, dining out, etc.

I know what you are thinking! The rule just reduced your 30% of wants expenses to only 10%! However, there is a rationale reason behind this calculation.

As we grow, we start planning to build our home 🏡, purchase a car 🚗, contribute towards our kids' education 🧑‍🎓, towards our retirement 🧓or foreign vacations ✈️! Hence, we need more money to save & invest!

Suppose you want to plan a trip to Europe, which will cost you Rs.3,00,000/- or want to purchase that iPhone for Rs.1,50,000/-. Now, this should become one of your financial goals, and you should start investing towards your goal. This piece of investment will come under the cap of 30% of income going to INVESTMENTS.

30-30-30-10 rule is just a stricter 💪 method than the 50-30-20 rule, however, you will understand its importance in just a few years of its implementation. 

Conclusion

We become more disciplined with money as time passes by. And these budgeting & expense tracking rules deeply help us in deriving the roadmap for achieving that discipline. 

Hope this blog was useful to you. We are just getting started! 😊