Personal Finance Rule of One-Third

You’ve just got a good annual bonus. Your partner wants to plan a trip to the Maldives, since “everyone on Instagram” has gone to the Maldives. But you wanted to use that amount to invest for your future. What do you do?

 You’ve just changed jobs and have been offered a good pay hike. You are tempted to splurge and buy a fancy car as your daily commute back to office has been draining your energy. 

 

Your parents have just sold their ancestral property and have deposited a bulk amount in your bank account for you to use it as you please. Family members are advising you to use that as a downpayment for a big 3BHK house downtown and take on a home loan –  since a home is an “asset” and they assume you’ll otherwise spend that amount of “useless” luxuries. 

 

How do you balance your life between spending for joy, versus ‘investing’ in assets? How do you balance between your needs and wants? How do you balance between saving for the future and splurging on luxuries that everyone else seems to afford?

 

We have a simple suggestion to help give your personal finances a structure – a sort of swim lane, if you will. 

 

The personal finance rule of one-third:

 

Divide your total income into three equal parts. If you are planning as a couple, take the joint income of both partners. 

 

  1. 33% of your Income – is your Essential Expenses or ‘Needs’ bucket. 

  2. 33% of your Income – is your Investment bucket

  3. 33% of your Income – is your ‘Wants’ bucket – or your splurge budget

 

Why does this work?

 

A typical rule of thumb is to invest for retirement, an amount equal to your current essential expenses. The above rule ensures this and still leaves a third for discretionary expenses. This way you ensure you don’t feel left out when others are seemingly living a luxurious life, while you are focused too much on whether you are saving or investing enough for the future. At the same time, this also ensures your lifestyle doesn’t increase way beyond what you can actually afford, because you are not compromising tomorrow’s financial security for today’s luxurious enjoyment. 

 

As with all things in life, personal finance is all about balance. And while this thumb-rule suggestion is generic, only you can decide what % brings balance to your life. 

 

But whatever % you decide, sticking to it with discipline through the years is recommended. As your income increases, or you get your yearly bonus, or you receive a one-time windfall gain through your ancestral property or a lottery ticket, sticking to the same structure and limiting your lifestyle expenses to the specified ceiling will you retain the balance in life over the long term.


How to make this work?


A good place to start is by tracking your income and expenses properly. This excel might be a good place to

start.


Fill this up and email it to: finandme.finance@gmail.com for a FREE review of your financial situation and help you get started on your path to financial independence.

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