Hello friends, who doesn't want to be rich? But what should be the most important thing for getting rich? Many people think that only business is the way to get rich and no one can become rich with a salary or regular income. But this is not true. If you see the statistics or in fact, if you see around you, you'll find many millionaires who are in the salaried class. Let's say it took them 20-25 years to become rich, but why did they become rich? Because they had financial discipline. They had habits of saving money, investing regularly, researching, and investing money in the right place.
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| 50-30-20 Money Rules |
But when we start our careers, many personal finance experts recommend keeping half of the salary for savings and investments. Now my salary is only Rs.15,000-20,000, and that's not even sufficient for my expenses. So how can I follow that? This is very true because youngsters need to fulfill their basic necessities. So because of this, youngsters don't even start savings and investment habits. And it becomes so late to start this habit that you don't get the compounding effect you might have gotten.
When you start investing early, your money gets multiplied each year, and that's why rich is always rich. If you start saving and investing at the age of 21-22, you can definitely become a millionaire. You may take retirement 10 years before the one who will start investing 10 years from now. Because you may have that sufficient corpus amount, which can give you interest equal to your income 25-30 years later from now. So that's why it is important to maintain discipline.
Now the framework for the youngsters and experienced people should be slightly different. The same rule cannot be applied to both. So that's why let's see what the applicable framework is for youngsters and what percentage should experienced people save, how much they can spend on their basic necessities, and how much they can spend on their wishes and wants. If you just started your career, then you have to follow this simple rule. Which is the 50-30-20 rule of money. Now let me explain what that means.
The 50-30-20 Rules of Money
50%- Needs
You can spend 50% of your monthly income on your basic needs. Now, what comes under basic needs? Rent or EMI. You can consider the rent of the house in which you are living, or if you took a loan to buy that house, you can consider its EMI. Here you don't have to consider the EMI of any real estate for investment purposes. So only consider the EMI of the house you're living in. Besides that, food, transportation, and clothes—all these are obviously your basic needs. Food, clothes, and shelter are the basic necessities in today's time.
Even some more basic necessities are added in these modern times. Which are electricity, water, gas, phone, and internet; all these are basic needs. Nowadays I'm not asking you to remain confined till here; you should decide your own basics. These are my minimum requirements, and I have to spend on these. But try to control the expenses for your needs. You can spend 50% of your monthly income as the maximum money on your needs.
Let's take an example. Rs.15,000-20,000 is normally the starting income nowadays. Let's say Rs. 20,000 is your starting income. So 50% of Rs. 20,000, which is Rs. 10,000, is what you can spend monthly on your basic needs.
30%- Wants
After this, let's talk about wants. There's a difference between wants and needs. Wants are your wishes and not your basic necessities. For example, a car is not your basic necessity. You can also go to your office or commute using public transport. Going on vacations and expensive clothes. I took clothes and basic necessities, but if you want to buy expensive and branded clothes, then it will fall under wants.
Consumer electronics. Like if you want to buy an expensive phone. There's no problem in buying an expensive phone, but control it according to your income or save money for that. After that, you can buy. So a phone, an expensive laptop, a home theater system—all these fall under your wants and wishes.
For all these, the maximum you can spend is 30% of your monthly income. So 30% of Rs. 20,000 is Rs. 6,000 per month; that means you can spend Rs. 72,000 yearly on these wants. You can decide how to spend those Rs. 72,000. After these, 20% of your income should definitely be reserved for savings and investments.
20%- Savings & Investments
Now, why do we do savings and investments? See, retirement is a very neglected area because nowadays people are there in private jobs. Even in government jobs, the government is terminating the pension schemes nowadays. So retirement planning is really very important. Education for kids, marriage, an emergency fund that you want to keep for the future, and medical emergency funds. So for all these, it's very important to start savings and investments right from the beginning.
So that's why I'm saying that when you start your career, definitely, you have to fulfill your basic needs and some wants. Because youngsters have desires to wear good clothes and have an expensive phone. So definitely you can spend some money on your wants. But at least keep 20% for savings and investments.
Now, what are savings? You can opt for a normal FD, open a provident fund account, or invest in stocks, mutual funds, or real estate. So there are many options, but discipline is very important.Now if we talk according to this example, then you should at least reserve Rs. 4,000 for savings and investments out of Rs. 20,000. So this was all for those who are just starting their career.
How to save with an increase in income?
But your income increases with your experience. When you have experience of 4-5 or 8-10 years, obviously, your income would not be the same. So let's take an example that after some time, I'm taking a small example, not a huge one. Let's say your income is doubled. Although we know that in 10 years, income gets tripled or even four times in some cases. But we're assuming that your income increased to Rs. 40,000 per month.
So now what you should do? Should you increase your expenses in that same proportion? No! Now watch this: the 50-30-20 rule is very popular, according to me. As your income increases, you should increase the proportion of savings and investments. It should not happen that you increase the proportion of your wants. So according to me, you should increase in investment to 40% and reduce in wants to 20%.
Now I am focusing more on savings and investments. So when you get your salary or professional income. First of all, open an account and transfer 40% of your income for savings and investments. After that, when you'll be left with limited money, you'll spend in a limited manner on your needs and wants.
Now let's talk about this example. If we take 40% of Rs. 40,000, it comes out to Rs. 16,000. Now, if you were able to manage your needs under Rs. 10,000. Then Rs. 16,000 would also be sufficient. In fact, your lifestyle will be improved. If we find 20% of Rs. 40,000, then wants section comes out to Rs. 8,000. Earlier you were getting Rs. 72,000 in a year, and now you'll get Rs. 96,000 in your wants. So you can spend nearly a lakh on your wants. But if you increase your savings and investments, we get Rs. 16,000. Accordingly, your annual savings and investments will get increased very much.
Also Read: How to Manage Money? 5 Steps Simple Financial Plan
Retirement, education, marriage, medical emergencies, and all your future goals can occur anytime and in any number. So you would like to maintain your lifestyle in the future as well when your regular income will be terminated. Because you have to maintain a lifestyle after that also; that's why savings and investments should be increased.
So initially, we saw that the 50-30-20 rule works well at the beginning of the career. But when your experience increases, you can change this 50-30-20 into a 40-20-40 rule. Definitely, you won't face problems in managing savings, investments, retirement planning, education, and the marriage of kids.
So I think this concept is clear to you, but the most important thing is to start saving and investing. Whether you start from 10%, it's not any hard and fast rule that you should have 20% or 30% to invest and not before that. Once you start maintaining discipline from the start, you'll start enjoying it.
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