Posted by Author: Mohamed Hamza Ghaouri
Managing your finances will become easier if you rely on the 50/20/30 rule. It’s a popular rule developed by Senator Elizabeth Warren in her book “All Your Worth: The Ultimate Lifetime Money Plan” where she discusses wealth management techniques. So, what is this 50/20/30 rule all about?
The rule requires you to divide your net income into 3 shares. So, you should spend around 50% of your salary on needs, 20% on savings and 30% on wants. This is a great budgeting technique that allows you to allocate your funds wisely.
50% allowance for needs
It is important to distinguish the difference between needs and wants. It is categorized into needs, all the bills that are necessary for survival. This includes home rent, groceries, car payments, electricity bills, gas connection bills, water bills, etc. Needs are the products or services that you need to have in your daily life. But wants is something you wish to have.
Needs can be thought of as the bare minimum required to carry out your daily routine. Likewise, mortgage payments or loan repayments are also considered needs. Allocating 50% of your funds to your basic needs is essential. However, that 50% needs to be divided into two subgroups. The first one will be dedicated to the daily expenses while the other one should be directed to a minimum debt payment (rent, electricity, etc). The remaining half of the income should be divided into two portions as well according to 20/30% ratio.
30% allowance for wants
Wants are non-essential things that we desire. It includes dinner outside, going to the cinema, buying new gadgets, home appliances, vacation, etc. You can keep up to 30% of your income aside for fulfilling these expenses. However, funds allocated for these expenses can also be used as emergency funds.
It is very important to put a portion of your income aside each month. At least 20% of your earnings should be directed to your savings account. The savings account is primarily intended for wealth development and includes savings and investments. After you have collected a minimum of three months of savings to avoid unforeseen emergencies, you can start engaging your money in the stock market or other investment opportunities. Accordingly, Finterra offers an exceptional opportunity to individuals aiming at making a passive income through Finterra global planations Project.
With these savings and the creation of wealth, you can also reach your financial goals in the latter stages of your life and focus on retirement. However, this can vary depending on your debt and living cost. You can add an additional percentage to the needs if you have loan repayments and other essentials in the line. So, it depends on how much the needs demand from your income. Depending on your wish to meet financial goals, you can change the percentage to suit your needs, but make sure you stay with at least 20% savings, which is what drives your wealth-building!
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