Beginners can consider 50:30:20 budgeting rule

However, traditional approach of tracking expenses, cutting frivolous ones offers tailor-made solution

Household financial savings moderated in the third quarter of 2020-21 (FY21) to 8.2 per cent of gross domestic product (GDP). This was the second consecutive quarter of moderation, according to Reserve Bank of India data. Though household liabilities moderated, it was more than offset by weakness in the growth of household financial assets (like deposits, life insurance funds, provident and pension funds, and so on).

At a time when many households have suffered job losses and reduction in business revenues, there is a need to rein in expenses. The best way to do so is by developing and sticking to a budget.

Those who already have such budgets need to revisit them. Jharna Agarwal, head, Anand Rathi Preferred, says, “Household budgets need to be revisited every year as one’s situation keeps changing.” Here are two budgeting strategies that you could consider.

The 50:30:20 strategy

Beginners may use the 50:30:20 strategy. Rishad Manekia, founder and managing director of Kairos Capital, says: “This rule works on the principle of splitting your income into three baskets: 50 per cent for your needs, 30 per cent for your wants, and 20 per cent for your savings and debt.”

In other words, 50 per cent of your paycheck should go toward things like rent, EMI, bills, food, credit card payments, insurance premiums, and so on. Thirty per cent should go towards the things you want, such as vacations, eating out, shopping, etc. And 20 per cent towards saving and investment.

This strategy has a few drawbacks. Manekia says, “The first issue is that what falls into the category of need, want, or saving is very subjective. It is entirely up to the user how he categorises his spending.” There is a need to be honest in drawing the line between what constitutes a need versus a want.

Manekia adds, “The second issue is that the 50:30:20 rule does not work in many situations.” For example, someone earning ~5 lakh a year and living in Mumbai may find it difficult to keep their needs under 50 per cent of income. While this rule is a good starting point to build the saving habit, it should be tweaked once a person has gained experience

in budgeting.

The traditional approach

Here, the first step is to develop greater awareness about your current financial position: Your own and your spouse’s monthly income, and income from other sources. Says Balwant Jain, investment and tax expert: “The second step is to understand your spending pattern by tracking your expenses. There is a huge gap between what people think they spend and what they actually do. Track expenses for at least two to three months.” Don’t ignore expenses that occur at higher periodicity. Agarwal says, “Don’t overlook quarterly and annual expenses, like school fees, insurance premiums, festival spending, etc.”

Analyse the data you have gathered. This will provide insights into the areas where you can trim expenses. Discretionary expenses are likely to offer the maximum scope for belt-tightening. On the non-discretionary side, switching to a loan with a lower interest rate can put more money in your hands. Similarly, exiting traditional insurance plans that neither offer adequate protection nor good investment returns can help.

Once you have started saving under various categories, ensure there is a plan for every rupee saved. Begin by building an emergency fund and then go on to invest for goals like purchasing a house, children’s education, your own retirement, and so on.

Seek professional advice from a certified financial planner if you need handholding for the budgeting exercise.