Monday, 6 June 2016

How to Budget Your Money with 40/30/30 Rule

Whether you are a parent with two kids or recent college graduate working your first job, 40/30/30 guideline can help you assess your budget. This approach often helps to understand the big picture of where the money is going.

Let us break your budget in three buckets (rather than the seemingly infinite categories of some traditional budgeting). It is designed to help you figure out how much you may want to allocate to each area every month, and can also help you determine the order in which your money can be allocated.


40/30/30 broken down

Fixed Costs

These are bills and expenses that dont vary much o monthly basis, like rent or loan payments, utilities and car payments. Also include subscriptions such as gym membership and DTH/Mobile/Internet accounts, in fixed cost because you are committed to payting them on a monthly basis.
When it comes to fixed cost, I would suggest that you aim to keep your monthly total not more than 40% of your take home pay.

Financial Goals
I would recommend keeping aside at least 30% of your take home pay towards important payments or contribution that will help you secure your financial foundation. I believe there are three essential goals everyone should strive for: savings for your goals, savings for retirement and building an emergency fund. But your financial goals can also include larger savings priorities, like a down payment on a new home or child’s education funding and lifestyle goal such as a vacation or a dream car.

Flexible Spending
Finally, consider budgeting not more than 30% of your take home pay towards flexible spending. There are day to day expenses that can vary from month to month, like eating out, groceries, shopping, hobbies or entertainment.
I have included groceries in flexible spending because even though food is a necessity in your budget, how you spend on food can vary. Some days you would prefer to dine out and some days you prefer to make it yourself. It doesn’t really matter what you spend your money on each month in this category, as long as you are aware of your spending and not going over total flexible budget each month

One Note on Taxation
As you might have noticed the 40/30/30 guidelines applies only to take home pay. The deductions that are happening before the salary hitting your bank account is not considered. The deductions may be towards Provident Fund, Income Tax etc. While choosing to invest in retirement plans, equity linked tax savings mutual fund schemes you would save larger amount of taxes depending on Income Tax slab you belong to.

If you are just starting to put together a budget, the 40/30/30 guideline can serve as a useful benchmark for how to divide up your income.  When it comes down to it. Though, how you spend (and save) your money depends on your specific goals and lifestyle.

So be a smart and informed investor – check how much insurance do you need and why you should in invest in Mutual Funds versus ULIP after analyzing the above two you can invest money via sip in best 3 equity mutual funds in India for Retirement

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