50/30/20 Budget Rule: Time to Change?

Senator Elizabeth Warren in her book “All Your Money” published in the year 2006 logilcally brought out a Plan popularly known as “50/30/20 Budget Rule” which is internationally acknowledged and accepted formula for Financial Planning . It is almost 15 years when she analysed the threshhold limit of Expenses and Savings prescribed to achieve the financial goals in one’s life.

With a complete changed scenereo over the last 15 years, scope of future expenses like Child Education,Retirement Fund,Emergency Fund and buying a house has made a sea change. Various faculties of higher education viz. IT/Medicine/MBA etc has become very costly. Gone are the days when future education was planned by the parents and kids would pursue on the dotted lines. The kids are more enlightened about planning of their own lives these days. Who knows which degree will they decide to pursue after ten years.

With commercialisation of sports, a few kids are crazy to pursue their career in sports which is again a very costly affair as the trained coaches/sports gears/diets demand a great commitment and heavy expenditure.

Similarly emergency fund equaling three months salary as suggested in the existing thumb rule does’nt appear sufficient to ward off the problems likely to happen in view of tough times like COVID-19

Recently, we have witnessed how the prevailing Pandemic conditions have subjected the whole world to unforeseen, unprecedented and unpleasant circumstances making the life uncomfortable not only for general public but also for the high paid individuals and businesses alike.

Accordingly with more emphasis on savings, a simple plan ie 30(Savings) /50(Living Expenses)/20(Wants and Desires) has been contemplated to provide more viable solution in such a way that you achieve all your life goals comfortably. Let’s discuss this new formula minutely as under:

It is very difficult to save after spending on household chores as suggested on various platforms including the book under reference. Before starting to spend anything out of your net income, you must reserve 30% upfront as Savings and use the balance i.e 70% for Living Expenses and Wants/Luxuries subsequently as under:

• Savings 30%: We need to allocate this fund under three categories: i) Emergency Fund 10%: life throws unexpected challenges sometimes when we lose our job/ business or face a medical emergency and there are not enough savings to confront these unforeseen circumstances. Create an emergency fund equivalent to at least 8 Months of Salary. Likelihood of getting any alternate employment in three months is remote and the family may find itself under great distress. This fund can be used during the uncertain times without resorting to easy high cost credit from Banks. ii) Child Education: As discussed herein above, increasing costs of education warrants to save 10% to afford higher education for your kids. You can utilise the corpus for upfront payment or as a margin for raising education loans for higher technical education overseas. This Fund will certainly help in fulfilling the dreams of kids who aspire to make their career in sports
• iii) Retirement and Home: With more health conscious society and quality of life, there is every possibility of living longer after retirement which require continued cash flows, You need to save at least 10% for accumulating corpus for retirement which could generate enough cash for living expenses.

• Living Expenses: 50%: These expenses pertain to day to day livelihood of the family. Groceries, Health Insurance, Insurance, Car EMI,Utilities,Rent/Mortgage are the major expenses required for your survival. As per the existing thumb rule this amount looks sufficient to enjoy a comfortable life.
• Wants/Luxuries 20%: We need to provide for Shopping/Dining out/Costly Electronic gadgets/Sports/Holidaying etc. Regular savings in this portfolio will help you to enjoy all worldly pleasures with ease without falling back on emergency fund. This Fund will also vindicate the saying”Dont compromise with your present for the sake of Good Future”

Contemplated Budget Rule

I would feel honoured to hear from my illustrious friends about viability of the proposed/contemplated Budget Rule and its applicability in normal as well as extraordinary times in one’s life. Your valuable suggestions will make this exercise worth consideration by the people who matter in studying the art of Financial Planning.