30-30-30-10 budget rule: Income allocation under Housing, essentials, savings and investments, lifestyle

Don’t have any money left for savings and investments at the end of the month due to overspending? Follow the 30-30-30-10 savings method and strike a balance between spending related to housing, needs, savings, investments, and entertainment.

30-30-30-10 budget rule: Strike a balance between expenses and investments

Some people struggle to manage their expenses because they overspend. For them, investing in financial goals may seem like a distant dream. Others are able to manage their expenses slightly better and redirect some savings towards their financial goals. But even here, the money invested is less than the actual amount required to meet their financial goals. Budgeting can solve the problem for people in both categories who overspend or save/invest less than required. In this article, we will discuss what you need to know about the 30-30-30-10 savings method.

What is the 30-30-30-10 savings method?

The 30-30-30-10 savings method helps you allocate certain percentages of your income in specified spending categories. Post allocation, you can spend the income on those categories by staying within the defined spending limits. 

The income allocation to specified categories will look something like this:

The income allocation to specified categories will look something like this:

For example, if an individual has an annual income of Rs 10 lakh, they can use the 30-30-30-10 savings method in the following manner:

hey can use the 30-30-30-10 savings method in the following manner

The 30-30-30-10 savings method ensures you invest money towards your financial goals to fulfil them. At the same time, it also ensures you enjoy life by allocating some money towards entertainment.

Related: Have You Been Budgeting But Not Getting Any Results? It's Time To Relook At The Methods

How to implement the 30-30-30-10 savings method

Take the following steps to implement the 30-30-30-10 savings method:

1) Figure out your monthly income

The first step is to figure out your monthly income. If you are an employee with a fixed monthly salary, this is simple. If you are a professional or a freelancer, your monthly income will vary. In such a case, you can start with a 6-month average income. If you have any additional monthly income coming in the form of rent, interest, dividend, etc., add it to your regular monthly income to arrive at your overall monthly income.

2) Categorise all your expenses into the four broad categories

Once you have figured out your monthly income, you need to list all your regular monthly expenses. After listing all your monthly expenses, you need to categorise each expense into one of the four broad categories. Expense on work-related clothing will go into the needs category, whereas other clothing may go into the wants category. It’s the same with work-related travel and vacation-related travel.

Related: 100 Smart Ways To Improve Your Finances

3) List down all your financial goals

Once you have listed and categorised your expenses, you need to focus on your financial goals. Only if you have clarity on your financial goals will you be able to effectively use the 30% allocation for the saving and investments category.

Here are some common financial goals that most people have:

a) Building and maintaining an emergency fund with 3-6 months’ income
b) Adequate term life insurance cover for all the family earners
c) Adequate amount of comprehensive health insurance cover for all the family members
d) Building a fund for a child’s higher education and marriage
e) Building a retirement fund for self and spouse
f) Making best use of all tax benefits while investing for financial goals
g) Prepayment of loans
h) Estate planning

4) Start spending and review regularly

Once you have figured out your income, categorised your expenses, and set a proper financial plan in place, it is time to put everything together and start implementing the budget. You may start spending the monthly income on categorised expenses and investing towards financial goals. Track your progress at the end of each month.

If you are spending more than the allocated money on a specific category, you need to think of ways to cut expenditure in that category. If some money is lying unused in one category, you need to see how you can redirect that money effectively in some other category. For example, if some money is left from the housing or needs category, you can redirect it towards the savings category for prepayment of loans.

Related: 6 Effective Formulas To Help You With Wealth Creation

Progress to other budgeting methods

Once you become comfortable with the 30-30-30-10 savings method, you may consider shifting to other budgeting methods after some time. For example, you may consider shifting to the ‘Pay yourself first’ budgeting method. In this, you first invest towards all your savings and investment goals and then use the remaining monthly income for expenses. It will make sure you achieve all your financial goals - that too, well ahead of time. 

Whichever budgeting method you use, you need to make sure that you take care of your needs, invest towards your financial goals, and still get to enjoy life. Without enjoyment, you will lack the motivation to invest in your financial goals.

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