Everyone has financial goals. And while these goals might be pleasant to think about, realizing them isn’t easy. That’s why you must have a solid financial plan. It helps you align your priorities and work towards your long-term financial goals more efficiently. One of the most popular budgeting methods you can try to do this is the 50/30/20 Rule.
What Exactly Is The 50/30/20 Rule?
It is a simple budgeting guideline you can follow to allocate your funds. First developed by U.S. Senator Elizabeth Warren, it follows a simplified approach to putting your money to the best use both short and long-term.
How It Works
The 50/30/20 Rule works by dividing what’s left of your income after paying all taxes using the following formula:
- 50% for necessary monthly expenses.
- 30% for luxuries and wants.
- 20% for savings (or debt repayments, where applicable)
It efficiently covers most of the areas money is spent in the average household and ensures you stay comfortable and happy while living within your means.
Practical Application Of The 50/30/20 Rule
Let’s assume your take-home is RM 5 000 post-tax. Following the 50/30/20 Rule, your monthly expenditure profile might look like this. You’d spend 50% of your funds (RM 2 500) on necessities like groceries, transportation, insurance coverage, rent, and other expenses. Then, you’d spend another 30% of your salary (RM 1 500) on activities like going to the gym, seeing a movie with friends, or shopping for clothing. The remaining 20% (RM 1 000) will then find its way to a retirement scheme or your savings account. Something to note here is that although Warren made the allocations for savings the smallest, she emphasizes that it’s the most important. She explains that saving is better than not saving at all, even if it’s only a little at a time.
What About The 10% Savings Rule?
Made famous in the 1920s, economists in Malaysia determined that simply saving 10% of your income would be enough to last you through retirement. While this strategy might’ve worked then, it certainly won’t now. The primary reason for this is that, back then, life expectancy in Malaysia was around 60 years. As of 2020, the life expectancy of Malaysians has increased to 76.22 years. Consequently, people who want to outlive their retirement savings must put away more money.
What To Remember When Using The 50/30/20 Rule
While this Rule works quite well, it’s vital to remember that the 50/30/20 Rule isn’t the best strategy for overall financial wellness. Instead, you can follow a broad guideline to better structure and improve your budgeting efforts.
While the 50/30/20 Rule is undoubtedly great, it is not in stone. What’s more, you might even be able to increase its effectiveness by reallocating the markers to suit your situation better. The most important thing is finding a way to save as much as possible and secure your future.