Many people have a steady income, but how they spend it is very important if they want to reach their financial goals, like taking that dream trip, paying for their child’s education, or having a safe retirement. Often, it’s hard to find a balance between paying for your needs and saving and investing for the future. In this case, the 40-30-30 rule is a simple but effective way to get your finances under control.
You might have heard the 50-30-20 rule from many experts but it didn’t work for me so I moved to more savings and investings side to achieve better future financial goals. You can also make your own financial strategy but in this post, we will discuss only the 40-30-30 rule and how you can take advantage of the same.
Understanding the Financial 40-30-30 Rule
Let us assume that your monthly salary is Rs 50,000 per month (after deducting tax). So
Imagine your monthly salary after tax is Rs 50,000. The 40-30-30 rule suggests dividing this income into three categories:
1. Essentials (40%): This covers your basic living expenses like rent, groceries, utilities, transportation costs, and minimum debt payments. First keep aside this amount from your monthly salary.
2. Savings (30%): This acts as your safety net. Build an emergency fund to handle unexpected events like car repairs or medical emergencies. It can vary as per your monthly requirements.
You can make savings – 25% and essentials – 45%, if needed or you can follow the 50-20 rule.
3. Investments (30%): This amount is needed to grow your wealth for long-term goals like retirement or a down payment on a house, children’s higher education. Consider Systematic Investment Plans (SIPs) in mutual funds to start investing with smaller amounts.
I have kept investment – 30% of the salary as I am looking forward to longer investment and future goals. Early retirement is one of them.
The Benefit of Flexibility
The 40-30-30 rule is not a rigid formula. It’s kind of like a financial planner that helps you handle your money in a healthy way. This works for everyone, whether they are a salaried person or having their own business. The important thing is to make it fit your specific needs and financial goals.
Young adults just starting out: If you are young, you can easily allocate a higher percentage towards savings to build your emergency fund and explore different investment options to build your future.
Individuals with significant debt: You need to prioritize debt repayment while formulating your own financial planning but it is advisable to set aside a reasonable amount for savings and investments.
Remember, the goal is to find a sustainable approach that you can stick with in the long run.
Here are some additional tips
Keep track of your spending. watch where your money is going to find the right strategy to save your money. There are a lot of apps and tools that can help you make a budget.
Monthly Review and make changes: Check your finances often and change how you spend your money as your income, costs, and goals change.
The 40-30-30 rule is just the start of your trip with money. After following these rules and being cautious, you can create a safe and successful future.
Read more: Financial Planning Tool for your Monthly Investment
