50/30/20 Rule of Budgeting: A Simple Formula for Smart Money Management

Posted on Monday, September 9th, 2024 | By IndusInd Bank

Does it feel like your salary vanishes as soon as it hits your account? Between rising rents, EMIs, and daily expenses, saving often takes a backseat. But what if there was a simple formula to manage your money better? 

That’s where the 50/30/20 rule comes in – a tried and tested budgeting method that helps you balance expenses, savings, and lifestyle choices. In this blog, we’ll explore how this rule works, break it down with real-life examples, and share tips to make it work for you. 

What is the 50/30/20 Rule? 

The 50/30/20 Rule is a simple and effective budgeting method that helps you manage your income wisely. It divides your earnings into three key categories: 

50% for Essentials (Needs) 

These are non-negotiable expenses that are necessary for daily life and survival. This typically includes: 

• House Rent or Home Loan EMIs 

• Grocery Bills (staples like rice, dal, and vegetables) 

• Utility Bills (electricity, water, internet, mobile recharge) 

• Transport Costs (fuel, metro/bus fares, Ola/Uber rides to work) 

• Healthcare Expenses (insurance premiums, medicines, doctor visits) 

• Children’s Education Fees (school tuition, coaching classes) 

Tip: If your essential expenses exceed 50% of your income, look for ways to cut down on non-essential costs or increase your income. 

30% for Lifestyle (Wants) 

This category covers expenses that improves your lifestyle but are not necessary for survival. This category may include: 

• Dining Out & Food Deliveries (Swiggy, Zomato orders, weekend outings) 

• Entertainment (Netflix, Amazon Prime, movie tickets) 

• Shopping (clothes, gadgets, accessories) 

• Vacation & Travel (weekend gateways, international trips) 

• Luxury Services (gym memberships, spa treatments) 

Tip: Prioritise what truly adds value to your life. If you love travelling, set aside some money for it while cutting down on impulse shopping. 

20% for Savings & Debt Repayment 

This portion is crucial for long-term financial security and should be used for: 

• Emergency Fund (6-12 months of expenses in a savings account or liquid fund) 

• Investments (fixed deposits, recurring deposits, mutual funds, stocks) 

• Retirement Planning (PPF, EPF, NPS) 

• Loan Repayments (personal loan, education loan, home loan) 

Tip: Automate savings by setting up SIPs in mutual funds or recurring deposits to ensure consistent financial growth. 

Also Read: How to Save for Your Retirement with a Savings Account 

How to Apply the 50/30/20 Rule to Your Budget? 

Following the 50/30/20 rule is simple but applying it in real life requires a structured approach. Here’s how you can implement it step by step: 

Step 1: Calculate Your Monthly Income: 

Start with your net income (take-home salary after tax deductions and PF contributions). If you have variable income (freelancing, business, etc.), take an average of the last 3-6 months. 

Here’s a Quick Example 

Let’s say your monthly take-home salary is ₹60,000. Here’s how you can allocate it using the 50/30/20 rule: 

Step 2: Track Your Expenses 

List down all your monthly expenses under Needs, Wants, and Savings. Use a simple Google Sheet, budgeting app, or even a notebook. 

Tip: The new and improved mobile banking app by IndusInd Bank – INDIE has a feature called MoneyMate that helps you track your expenses. 

Step 3: Adjust Your Spending 

If your needs exceed 50%, try reducing non-essential expenses (e.g., switch to a more affordable mobile plan). If your wants exceed 30%, prioritise what truly adds value to your life. 

Step 4. Automate Your Spending 

Set up automatic transfers for: 

• SIP in mutual funds or recurring deposits 

• Fixed Deposits for short-term goals 

• PPF/NPS for retirement planning 

Step 5: Monitor & Review Regularly 

Review your budget every month or quarter to check if adjustments are needed. Life changes—so should your budget! 

Benefits of Using the 50/30/20 Rule 

The 50/30/20 rule is more than just a budgeting technique—it helps build financial discipline and stability. Here’s why it works so well: 

1. Ensures a Balanced Financial Life 

It prevents overspending while ensuring you save and invest consistently. Unlike traditional Indian budgeting, which often focuses only on savings, this rule allows for both financial security and lifestyle enjoyment. 

2. Simplifies Budgeting 

No complex calculations—just three clear categories. This makes it ideal for: 

• First-time budgeters 

• Young professionals starting financial planning 

• Families managing household expenses 

3. Reduces Financial Stress 

By setting aside money for savings and investments, you’re prepared for emergencies and won’t have to rely on credit cards or loans. 

4. Helps Build Wealth Over Time 

Consistently saving and investing 20% of your income means you build long-term wealth through: 

• Mutual Funds (SIPs) 

• Fixed Deposits & Recurring Deposits 

• PPF & NPS for retirement 

5. Adaptable to Different Income Levels 

Whether you earn ₹30,000 or ₹3,00,000 per month, this rule works! You can tweak the percentages slightly based on personal priorities. 

Also Read: Holi 2025: Valuable Financial Lessons to Learn from the Festival of Colours 

Common Mistakes and How to Avoid Them 

Even with a simple rule like 50/30/20, people make mistakes. Here are the most common ones—and how to fix them: 

By avoiding these common mistakes and making small adjustments along the way, you can ensure that the 50/30/20 rule works effectively for you. With a balanced approach to spending, saving, and investing, you’ll be on the path to financial stability and long-term wealth creation—without compromising on the lifestyle you enjoy.