We’ve probably all done some form of budgeting, from creating a spreadsheet to downloading a finance organising app that claims to complete the job for us in one night. Some fade out, some remain because they’re easy to follow, and don’t require constant effort to maintain.
One particular method has been proven to be the best one, exactly because it does not require a hard tracking of each and every rupee spent. Let’s find out what this approach is and why nearly everyone involved in the process finishes with a Systematic Investment Plan (SIP).
The Method in Question: The 50-30-20 Rule
The 50-30-20 rule is a strategy of putting 50 per cent of after-tax income into needs, 30 per cent into wants and 20 per cent into saving and investment. Simplifying the budgeting process became a favour to people without a lot of making classifications for all the expenses. Needs include rent, food, utilities and other necessities. Desires to pay for eating out, entertainment and lifestyle. This is where it gets interesting, as that 20% is what you should save for to achieve your financial goals and not spend it on others.
That’s because many people who do this sort of budgeting end up starting an SIP plan that they didn’t intend to carry out. The rule structure generates a positive monthly return, and an SIP is the simplest method of consistently utilising the positive monthly return irrespective of market conditions.
Each one of the 20% buckets will lead to an SIP.
Once you have determined 20%, what do you plan to do with it? The savings account usually doesn’t beat the inflation rate after a long period of time. This might be a bit frightening to invest a lot of money in one transaction if markets are volatile.
It can be overcome with the help of an SIP. That will make it easy to invest in mutual funds on a monthly basis, matching the monthly allocation in the 50-30-20 rule. If you have a fixed plan in your mind for every month, then SIP is nothing but a plan for that.
This is the aspect which results in a lot of individuals finding themselves beginning an SIP which they didn’t anticipate having to begin. The surplus is generated by the structure of the rule, and an SIP is the easiest way to systematically invest in this surplus.
Making the Numbers Work for You
It might seem like guesswork at first until you can determine the exact estimation for each bucket. This is where a 50-30-20 calculator becomes really useful. It will automatically allocate your income to three categories without requiring any calculation or possible error as to how much you should save.
After you are aware of the investable amount, you can choose a fund and the date from which you would like to start your SIP. The small step can make the whole process less stressful as you won’t now need to use a “best guess” or mental calculations that are susceptible to error. Some calculators have a setting to adjust the percentages slightly to account for your real expenses.
Choosing Where to Invest
The final step in the process will be to find the best platform for SIP investments. This is to offer a range of mutual funds, transparent fee structures and enable convenient tracking of investments. Expect that your income and goals might vary over time, and if good platforms, then they should be easy to start, stop or increase your SIP.
A Quick and Easy Rule for Generating Long-term Profit.
Budgeting is not a very exciting concept, but the 50-30-20 rule will do much work without you ever knowing. It clearly differentiates between requirements, desires and savings to eliminate the uncertainty in decision making and ensures a natural surplus that is appropriate for an SIP.
This approach makes investing part of your routine, and consistency will naturally become second nature to you. Thus, over the years, it’ll really make a difference in achieving your financial objectives.
**’The opinions expressed in the article are solely the author’s and don’t reflect the opinions or beliefs of the portal’**
