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The 30:30:30:10 Rule Explained: Know How It Changes As Your Age Increases?

The 30:30:30:10 rule is a popular rule that guides how you should allocate your expenses in your earning stage and how you should allocate when you are in your retirement phase

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30:30:30:10 Rule
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The 30:30:30:10 rule is a thumb-rule effective for both income and pension planning, offering a structure for how to financially manage your earnings and retirement corpus. To easily navigate budgeting, investment and your retirement phase this rule can serve as a guiding principle. Though traditionally income planners use this rule for navigating the retirement phase, the same rule can be adapted to show how you should divide your earnings to reach the retirement phase. Rules change depending on if you are doing income planning or pension planning. Let's delineate four parts in the 30:30:30:10 rule.

First 30% Allocation

When you are in income planning, the 30:30:30:10 rule advocates dedicating the first thirty per cent of income to essential daily expenses. This portion can cover necessities like utilities, groceries, gas and transportation, ensuring you cover your daily needs. Earning individuals can thus maintain a baseline standard of living while leaving room for discretionary spending and savings, which we will come to later.

The rule of the first 30 per cent for your daily spending does not change even if you are in the retirement stage. Senior citizens should invest a portion of this 30 per cent in debt category schemes and can live off timely interest paid by debt schemes.

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Second 30% Allocation

The next thirty per cent in the 30:30:30:10 rule should be kept aside for investments. This allocation can be invested in suitable investments depending on how near you are to your retirement. The investment portion serves for wealth accumulation, growth, and future expenses. Senior citizens in their retirement age can use 30 per cent in home loan repayment if it is not still repaid or in buying a new property for children as their inheritance. They can invest this corpus in high-risk investments like stocks or equity mutual funds and nominate their children as heirs.

Next 30% Allocation

Thirty per cent of your income, if you have not retired, should be designated for retirement savings under the 30:30:30:10 rule. But for earning individuals this 30 per cent is optional because you have already kept 30 per cent as investments for the future in the second part. So they can use this portion for home loan expenses buying a property etc. For retirees, experts suggest that they must direct 30 per cent of their savings into a hybrid fund.

This is to ensure that the entire portion will not be affected by the volatility of equity investments if there is some market downturn.

Final 10% Allocation

The final ten per cent of the 30:30:30:10 allocation should serve as a contingency fund for emergency expenses regardless of your age, which is like a safety net against unforeseen financial challenges. Medical emergencies or job loss can hit you even in your youth.

So 10 per cent should be kept in cash and cash equivalents for contingencies. Rather than letting it sit in a savings account, you can use alternatives like liquid debt funds. This allocation can go a long way in giving you peace of mind.

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