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- Needs-necessary expenses that cannot be stopped
- Wants- expenses that give satisfaction/happiness but are not necessary
- Savings- a fixed allocation from your income that needs to be preserved for a rainy day
In this day and age, necessities are only becoming more expensive. With needs taking away most of your income, how do you ensure that you have enough left to allocate to wants and savings?
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He highlighted an important thumb rule that one must follow while budgeting expenses, which is the 50-30-20 rule of financial planning.
What is this rule?
30% of your income must be reserved for wants. These wants could include recreational activities, an outing with the family, opting for a hobby, dining at restaurants, etc. While these events are fun to experience, they are not necessary for nature and if need be, can be compromised upon.
Lastly, 20% of your income must be used for savings. These savings could include any investment/s of your choice based on your risk appetite.
When you have a fixed distribution that you know you are going to allocate to the different categories of expenses, it becomes easier for you to create a budget each month, and stick to it. As income increases, one can tweak the allocation of funds to the three categories, fundamentally on the back of these guidelines.
