A lot of money gurus would argue that investment is the first step towards financial independence. But I have a slightly different opinion. I believe budgeting is the first step. 

Without a proper budgeting system in place, the chances of you blowing your money are higher in comparison to saving it. Trust me I know what it’s like. There have been months where my salary hit my bank account, and I’m all out within 15 days. I end up relying on my credit card to survive the month. 

Now obviously, the credit card statement would get generated next month, and there goes my salary again. So, unless this behavior is fixed, you’d always be living paycheck to paycheck. 

Also Read: How to create a budget in 5 simple steps!

The 50-30-20 Budgeting Rule

Enter the 50-30-20 rule! What even is this rule? Let me first explain how this budgeting technique works. 

According to this rule, one needs to utilize 50% of your in-hand income for all your needs. 30% of it for all your wants. And save 20% of it every month. 

This rule helps save a decent portion of your income by setting it aside at the start of the month itself. This way, you’re forced to keep your expenses within 50%. There’s also good leeway to splurge on any of your wants with 30% of the amount. 

There are majorly 2 components that are going to help your money compound and grow here. Firstly, the amount you’re saving itself needs to be big. This will depend upon your income. If you have a high income, then this 20% itself will be a bigger chunk. 

But what if you’re just starting out? With current inflation and big financial goals such as an education or purchasing a home, saving just 20% won’t be enough. 

What’s the twist?

This is exactly why you need to make a small tweak to the 50-30-20 Budgeting Rule. 

You are not going to earn the same amount of money every year. One will have yearly appraisals, bonuses, etc. You will need to just increase your savings by a bigger amount in proportion to your raise.

Now, I am not asking you to be a complete miser. Instead, try to limit and not immediately increase your living expenses. Lifestyle inflation can be bad if you mindlessly blow your money. There’s a difference between lifestyle inflation and standard of living. 

On the other hand, one can focus on improving their standard of living. This is exactly why you still have that 50% for your needs. But, instead of increasing the 30% of your wants, try to increase your savings. 

This way you will eventually increase your SIPs, which may seem like a small increase now, but over time will compound and multiply. 

Also Read: Investment Rule of 72 vs Rule of 114 vs Rule of 144 – Explained

Let me give you a numerical example: 

Current situation:

• Monthly Salary Rs. 50,000. 
• Needs Rs. 25,000
• Wants Rs. 15,000
• Savings Rs. 10,000

After an Increment of 10%:

• Monthly Salary Rs 55,000
• Needs Rs. 26,500
• Wants Rs. 15,000
• Savings Rs. 13,500

What I’m implying here is that you don’t need to immediately increase your needs and wants. They can remain the same for a while. 

Only in situations such as an increase in rents, etc will your needs increase. Otherwise, try to keep it the same at least for a few years, or until your income level jumps significantly.

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Disclaimer: The above content is for informational purposes only. Please consult a SEBI-registered advisor before investing in any scheme.