Mastering your finances: The 50/30/20 budgeting for secured financial goals

You must have come across financial articles about delayed gratification and instant gratification. Delayed gratification involves investing now for your financial goals, which may lead to postponing spending money on enjoying life today. Instant gratification involves spending money on enjoying life today, which may lead to pushing back investments for financial goals. Many people get caught between instant and delayed gratification and cannot decide which one to go for. The best option is to take a balanced approach that involves a mix of both. The 50/30/20 budgeting provides a balance between enjoying today and securing future financial goals. Let us understand how.

What is 50/30/20 budgeting?

It is a budgeting method that involves allocating your income towards your expenses (needs and wants), savings, and investments in specific proportions as follows: 

Needs

You can allocate 50% of your income towards needs. These are necessary expenses that can’t be avoided or compromised. Some of these expenses include:

a) Groceries

b) House rent

c) Loan EMIs, credit card outstanding, insurance premiums, etc.

d) Medicines

e) Children education fees and other related expenses

f) Transport expenses

g) Utility bill payments

h) Any other non-negotiable expenses

All the above need-based spending are essential for survival.

Wants

You can allocate 30% of your income towards wants. These are discretionary or lifestyle expenses. While they are not essential like wants, you can incur them to enjoy life. Some of these expenses include:

a) Movies and other forms of entertainment like sports, OTT subscriptions, etc.

b) Travelling, vacations, etc.

c) Dining out or ordering food

d) Shopping

e) Buying or upgrading to the latest gadget

f) Spending on hobbies, or what you are passionate about, or learning new things

g) Any other discretionary or lifestyle expenses

While needs make you survive, wants make you thrive.

Savings and investments

You can allocate 20% of your income towards savings and investments. You can use this money to achieve financial goals and secure your future. Some of these include:

a) Building and maintaining an emergency fund. 

b) Buying term insurance for self, health insurance for family, general insurance for assets like vehicle, house, etc.

c) Investing towards your financial goals, such as a child’s higher education and marriage fund, own and spouse’s retirement fund, building a fund for starting a new business, house down payment, etc.

d) Tax planning: Investing towards financial goals in a manner that utilises the available exemptions and deductions under various sections of the Income Tax Act to maximise tax savings.

e) Estate planning: Making a Will to pass on assets to the legal heir(s).

With just 20% of your income, you may not be able to invest towards all your financial goals at the same time. In such a scenario, you may prioritise your goals and start investing towards them. As your income increases, you can invest towards the remaining financial goals.

How does 50/30/20 budgeting help you balance between enjoying the present and securing the future?

The 50/30/20 budgeting method has three components to it. The needs component to which 50% of the income is allocated is essential for survival. The remaining two components (wants and savings/investments) strike a balance between enjoying the present and securing the future.

The wants component, to which 30% of the income is allocated, allows you to enjoy life in the present. Remember the instant gratification concept that we discussed at the start of the article? The wants component enables you to enjoy movies, dine out, take vacations, etc. and enjoy life to the fullest.

The savings and investment component, to which 20% of the income is allocated, allows you to secure your future. It enables you to build an emergency fund, buy insurance, and invest towards your financial goals with tax planning, and estate planning. Comprehensive financial planning can help you attain financial freedom and secure your future. Thus, the 50/30/20 budgeting method is an excellent way to strike a balance between enjoying your present and securing your future.

Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached at LinkedIn.