Money Tips: Does your salary get over in 15 days? The 40-30-20-10 formula will guarantee savings..

Does your salary come in at the beginning of the month and get spent in half the month? Do you think of saving every month, but are unable to do so? This problem is not just yours but of millions of people who are unable to manage their income properly. If you are also facing this problem, then this magical formula of 40-30-20-10 can prove to be a game-changer for you. This formula advises you to divide your salary into four parts, so that, along with fulfilling your needs, you can fulfill your hobbies, save for the future, and always be prepared for sudden expenses. Let us understand this formula in detail and see how it can change your financial life.

This is a simple and effective budgeting rule, which divides your monthly income into four parts:

40% - Needs: These are the expenses without which you cannot survive.

30% - Wants: These are expenses that enhance your lifestyle, but which you can live without.

20% - Savings & Investments: These are savings and investments made for your future.

10% - Contingency/Emergency Fund: This is the amount kept aside for unforeseen expenses.

Let us understand each part in detail:

1. 40% - Your Needs

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This is the biggest part of your income, and naturally, it is also the most important. 'Needs' are the essential expenses without which it is difficult to live. These include:

Rent/EMI: Your house rent or the monthly installment of the home loan.

Grocery and food: Ration for the house and everyday food.

Utility bills: Electricity, water, gas, internet, and mobile bills.

Transport: Expenses for commuting to and from work (petrol, bus/train fare).

Health insurance premium: This is very important for the safety of you and your family.

Children's school fees: Essential expenses related to children's education.

Loan EMI (necessary): If you have taken a loan that is important for your life, like an education loan or home loan, EMI is necessary.

How to manage it?

First, take out 40% of your total monthly income and see if all your essential expenses fit into it. If not, you may have to reduce some of your needs or find ways to increase your income. Always try to keep your needs within this limit, as this is the foundation of your financial stability.

Example: If your monthly income is Rs 50,000, then 40% of 50,000 i.e. Rs 20,000 will be enough for your needs.

2. 30% - Your Wants

These are the expenses that make your life enjoyable, but which you can do without. 'Wants' are things you want to buy, but can compromise on. These include:

Eating out at restaurants/cafes: Eating out or having coffee.

Entertainment: Watching movies, going to concerts, subscription services (OTT platforms).

Shopping (non-essential): New clothes, gadgets, or anything you don't need immediately.
Travel: Going on holidays or weekend trips.
Party or social events: Going out with friends.
Expensive hobbies: Any hobby that costs a lot.

How to manage it?

Set aside 30% of your income for these expenses. This is the category where you can cut down the most if you're struggling to budget in a given month. Prioritise your wants and spend wisely.

Example: If your monthly income is Rs 50,000, then 30% of 50,000 i.e. Rs 15,000 will be enough for your wishes.

3. 20% - Savings & Investments
This is the part of your income that you should save and invest for your future goals. This is the most important part to secure your financial future. It includes:

Savings Account: Savings for short-term goals.

Mutual Funds/SIP: Stock market-related investments that can give you good returns in the long term.

Gold/Real Estate: For inflation protection and wealth creation.

Fixed Deposit (FD): Safe investments with low risk.

NPS/PPF: Long-term investments for retirement planning.

Debt Repayment (Additional): If you want to repay a loan early, you can use some amount from this part.

How to manage it?

Try to set this part aside as soon as you receive your salary. This is called the principle of "Pay Yourself First". This will ensure that you are consistently saving for your future goals. Set it on automatic transfer, so that this money automatically goes to your savings or investment account every month.

4. 10% - Contingency/Emergency Fund
This is a small but very important part of your income that you should keep aside for unexpected expenses. Life is full of uncertainties, and a strong emergency fund helps you deal with any financial crisis.

Disclaimer: This content has been sourced and edited from Zee Business. While we have made modifications for clarity and presentation, the original content belongs to its respective authors and website. We do not claim ownership of the content.