Savings formula
In today's era, the biggest challenge faced by working people is not just to earn money but to manage it properly. After receiving salary every month, the money is quickly spent on rent, EMI, electricity-water bills, children's fees and other needs. After this, very little amount is left for savings and investment. This is why the 50-30-20 rule for savings is considered an easy way for better budget planning.
This rule advises to divide your inhand salary after deducting tax into three parts. In this, 50% is kept for necessary expenses. 30% is meant for fulfilling lifestyle and personal hobbies, while the remaining 20% is earmarked for savings and investments. Necessary expenses include things like rent, ration, electricity-water bill, children's fees, insurance and EMI. Whereas expenses like eating out, travelling, shopping and entertainment constitute 30%.
Rent is the biggest expense of most employed people. Financial planners believe that rent should remain within 25% to 30% of your in-hand salary. If the rent becomes too high, then savings and investment are affected. For example, if a person's monthly income is Rs 1 lakh, then it is considered better to have his rent between Rs 25 to 30 thousand. This leaves enough money for other necessary expenses and investments.
Nowadays home loan, car loan and personal loan have become common. But many times high EMI spoils the entire budget. Financial Experts Total EMI should not be more than 30% to 40% of your monthly income. If a large part of your salary goes into EMIs, then sudden medical or emergency expenses can increase financial pressure. Therefore, before taking any new loan, you must check its EMI according to your budget.
SIP i.e. Systematic Investment Plan is considered to be the easiest and most effective way to create wealth in the long term. By investing a fixed amount every month, one gets the benefit of compounding and gradually a bigger fund is created. If a person starts a SIP of Rs 5,000 every month from the age of 25 and keeps increasing the investment over time, then a fund worth crores of rupees can be created by retirement. This is the reason why it is advisable to invest a major part of the 20% savings in SIP and other investment options.
Mere investment is not enough. Emergency fund and insurance are also very important for financial security. Health insurance protects against medical expenses, while term insurance protects the future of the family. Apart from this, there must be an emergency fund equal to the necessary expenses of at least 6 months. This fund is most useful in case of job loss, illness or any big expense.
Often, with increase in salary, people also increase their expenses rapidly. This is called lifestyle inflation. Experts advise that as income increases, the amount of SIP and savings should also increase. If investments are set on auto-debit mode, it becomes easier to make regular investments and build a larger financial corpus in the long run.
The biggest feature of the 50-30-20 rule is its simplicity. This rule helps people to understand how much of their salary should be spent. If adopted properly, this formula can prove to be very helpful in reducing financial stress, increasing savings and achieving big goals in the future.
