This golden mantra tells you how to manage your monthly income. Your expenses can be bifurcated into needs and wants. Need are required for survival like groceries, medical, rent, EMI etc. and wants are expenses which is for luxury or lifestyle related like holidays, shopping sprees etc.
This rule tells you that from your income what should be your spend towards your need & wants and how much to save. Let’s explain the rule with an example. If your monthly income is 1 lakh, then –
• For need based expenses – Allocate 50% of your income i.e. not more than Rs. 50,000
• For want based expenses – Allocate 30% of your income i.e. not more than Rs. 30,000
• The remaining amount i.e. 20% should be invested or saved
With increase in income, the standard of living i.e. want based expenses usually increase. But as a prudent investor, you should always ensure that with surplus income, your investment component should go up while balance your life style expenses.