How 50-30-20 rule helps you meet investment goals

50-30-20 rule of budgeting advocates to devote 20 per cent of income for savings, 50 per cent for important and necessary expenses while 30 per cent for those expenses that are important but not necessary.

1. 50%: Needs

Needs are those bills that you absolutely must pay and are the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health care, minimum debt payment, and utilities. These are your "must-haves." The "needs" category does not include items that are extras, such as HBO, Netflix, Starbucks, and dining out.

Half of your after-tax income should be all that you need to cover your needs and obligations. If you are spending more than that on your needs, you will have to either cut down on wants or try to downsize your lifestyle, perhaps to a smaller home or more modest car. Maybe carpooling or taking public transportation to work is a solution, or cooking at home more often.

2. 30%: Wants

Wants are all the things you spend money on that are not absolutely essential. This includes dinner and movies out, that new handbag, tickets to sporting events, vacations, the latest electronic gadget, and ultra-high-speed Internet. Anything in the "wants" bucket is optional if you boil it down. You can work out at home instead of going to the gym, cook instead of eating out, or watch sports on TV instead of getting tickets to the game.

This category also includes those upgrade decisions you make, such as choosing a costlier restaurant food instead of a less expensive home cook vegetables, buying a Mercedes instead of a more economical Tata motors, or choosing between watching television using an antenna for free or spending money to watch cable TV. Basically, wants are all those little extras you spend money on that make life more enjoyable and entertaining.

3. 20%: Savings

Finally, try to allocate 20% of your net income to savings and investments. This includes adding money to an emergency fund in a bank savings account, making contribution to a mutual funds account, and investing in the stock market. You should have at least three months of emergency savings on hand in case you lose your job or an unforeseen event occurs. After that, focus on retirement and meeting other financial goals down the road.