Spend vs Save: How Much?

Managing your monthly income - whether from a salary, business, or professional earnings - can often feel overwhelming. But it doesn’t have to be. A simple and effective approach is to divide your income into three equal parts, ensuring that you cover essentials, manage liabilities, and build wealth for the future.

The 3-Bucket Formula

For ease of understanding, consider splitting your monthly income into three buckets of 1/3rd each:

1. Monthly Expenses (1/3rd)

This includes all your routine and household expenses - groceries, utilities, rent, lifestyle spends, and even luxury indulgences. The key is to consciously restrict this to one-third of your income. Living within this limit ensures you have enough left for other priorities.

2. Loan Repayments & EMIs (1/3rd)

The second bucket goes towards repaying existing loans - home loans, vehicle EMIs, credit card dues, etc. This helps maintain a healthy debt-to-income ratio and prevents financial stress. Ideally, this too should not exceed one-third of your income.

3. Investing for Long-Term Goals (1/3rd)

This is the most crucial bucket. Unlike savings, investing involves growing your money to meet future goals like children’s education, marriage, buying a home, that dream vacation, dream car, or building a retirement corpus. The magic of compounding works best when you consistently invest a portion of your income with a proper asset allocation, majorly into inflation-beating assets like stocks, equity mutual funds, and gold.

What If My Loan Repayments Exceed 1/3rd?

If EMIs are eating up more than a third of your income, you are likely over-leveraged. It indicates excessive borrowing relative to your earnings. While you can’t undo past commitments immediately, as your income grows, focus on increasing your investment allocation. Prioritize clearing high-interest debts and avoid further borrowing unless necessary.

Bonus Tip

If you’re fortunate enough to have no loans, it’s an excellent opportunity to divert even 50% or more of your income towards investments. This accelerates wealth creation and ensures financial freedom much sooner. However, as a thumb rule and bare minimum, you can simply ensure that not more than 70 per cent of your in-hand monthly income goes towards expenses + loans and EMIs and you are saving at least 30 per cent for your long-term goals. 

The Bottom Line

Discipline is the foundation of sound financial planning. By maintaining the above rules for expenses, EMIs, and investments, you create a balanced approach that secures your present needs while safeguarding your future. Remember, the goal is not just to earn but to create wealth over time that matches your standard of living and helps you achieve your financial goals.

(The author is a Chartered Accountant and CFA (USA). Financial Advisor.

Views personal. He could be reached on 9833133605.)