This is a budgeting framework for planning one’s budget and keeping track of the money we earn.
Have you just started earning? Are you eager to plan your budget and be financially sound in the way you spend your money?
The 50/30/20 Budgeting method is the perfect fit to facilitate these goals.
This method was magnificently defined and popularized by Elizabeth Warren and Amelia Warren Tyagi in their book All Your Worth: The Ultimate Lifetime Money Plan. This method involves splitting up your net income into 3 components and spending it accordingly.
50% set apart for “NEEDS”
According to this method, you should set aside 50% of your net income for “needs.” Anything that would make your life more difficult if you didn’t have it is a requirement. Those things are your necessary expenditures.
Food and shelter are the most basic needs. Groceries, living costs, rent, mortgage, electricity and water bills, health care, school fees for your children, and so on are all included.
30% covers “WANTS”
You can set aside 30% of your income for “WANTS.” Wants are items that you believe you require but can live without them. They are not essential to your survival. Infact wants are essentially extra costs that can be avoided.
Wants include shopping for extra clothing, jewellery, utensils, and kitchen appliances. Spending money on hobbies like painting, gaming, or reading; eating out or ordering takeout; and subscribing to streaming services like Netflix, Spotify Premium, and others comes under the category of your wants.
20% for “SAVINGS”
You should set aside 20% of your net income for savings, investments, and debt repayment. Setting up an emergency fund that consists of one year’s worth of living expenses to use in an emergency and putting money aside for retirement are examples of savings. The sum set aside for this would significantly help you in the long run.
Arguments against the Framework
Some of the major arguments against the 50/30/20 budgeting framework are that it can only be applied effectively if one earns a sufficient amount of income. For people with low income, the amount spent on living expenses might take up the most part of their expenditure, leaving very little to set apart for savings. Also some things in life cannot be explicitly classified as needs or wants. For example, although groceries are classified under needs, wishing to buy sweets or snacks can be considered as wants, as practically, those aren’t necessarily essential goods.
A simple and easy framework to follow
Despite the drawbacks, the 50/30/20 budgeting framework can be a starting point in planning out the allocation of funds in your budget plan. It is a very efficient way to prioritize needs over luxury, ensure that you save enough for the future, and live a financially sound lifestyle.
Customize it to match your style
You can build such a framework personally by first recording all the income and expenditure incurred in a month. Analyse it based on the given framework and tweak the ratio that suits your needs. A customized budgeting framework will bring financial discipline to your life. That will enable you to spend money on everything that you want or need in a sensible manner.
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