« How much returns should you expect from your retirement portfolio? Goal-based investing: does it work in India? »

Does the 50/30/20 budgeting rule work in India?

Posted on 14 Dec 2022
Author: Sayan Sircar

Tags: Budgeting

5 mins read
📢Join 2300+ readers on WhatsApp and get new post notifications!

This article shows you if you can apply the popular 50/30/20 budgeting rule for investing for your goals in India.

Does the 50/30/20 budgeting rule work in India?

What is the 50/30/20 budgeting rule?

The 50/30/20 budgeting rule, created by Elizabeth Warren in the book All Your Worth: The Ultimate Lifetime Money Plan splits your monthly budget into three categories:

you should spend up to 50% of your income on “needs.” These include mandatory items like rent/EMI, food, school fees, electricity/mobile bills etc.
you should spend up to 30% of your income on “wants” like entertainment, transport, clothes, and anything discretionary
the remaining 20% should be considered for investments and loans. This bucket will include all investments for financial goals as well as EMIs of loans

This article will examine what happens if an investor in India applies this 50/30/20 rule to their budget and investing plan.

Disclaimer: The purpose of this article is not to insist that you need to invest ₹X/month else your future is doomed. Instead, it shows you a way to understand thumb rules you will come across regarding budgeting and investing that you should understand before applying them to your situation. After all, we have heard this many times:

Personal finance is more personal than finance. - Tim Maurer

Why was the 50/30/20 rule proposed?

The purpose of the rule is to allow investors to get started with budgeting with a simple-to-understand thumb rule. It is also easy to implement if the investor needs guidance about how much should be invested for long-term goals like retirement.

The rule is suitable for people who need to get started, say if they are a new joiner on their first job. But it will be inadequate if you have invested for some time, as we show in the next section.

Did you know that we have a private Facebook group which you can join for free and ask your own questions? Please click the button below to join.

Does the 50/30/20 rule work in practice?

The rule mandates that 20% of monthly income will go into EMI and investments for typical goals like retirement, house down payment and children’s education/marriage. The rule works only if this 20% is enough for these goals.

For simplicity, we will assume no EMI, only retirement as the goal, and the only lifestyle cost for retirement be the same as the mandatory bucket today. These assumptions are justified like this:

having no EMI means that we can divert the entire 20% for long-term goals
we are absorbing all discretionary expenses in retirement into the mandatory bucket to offset expenses like rent payments and children-related (like school fees) will not persist into retirement

Therefore to put it simply, for someone with ₹100,000/month income, can saving ₹20,000/month suffice to have a lifestyle of ₹50,000/month in retirement? If the obvious answer (“No, it is not”) is not immediately apparent, here are some simple back-of-the-envelope calculations for a person earning ₹100,000/month with retirement 25 years away:

₹50,000/month lifestyle in retirement starting 25 years from now needs a retirement corpus of ₹2.4 crores in today’s money. We will ignore the effect of inflation by assuming a very reasonable zero real returns on investment
₹20,000 is invested for 25 years. That leads to a corpus of 25 * 12 * 0.2 = ₹50 lakhs in today’s money

Therefore if you are only investing ₹20,000/month at zero real return, you better have the difference, i.e. 2.4cr minus 50 lakhs, or ₹1.9cr already invested. If you do not have ₹1.9cr, then 20% will not be enough.

Understanding how 20% is not sufficient

To understand these calculations, we have assumed that salary hikes, lifestyle expenses and returns from the retirement portfolio all happen at the same rate. We have covered this topic here: How much returns should you expect from your retirement portfolio?.

We can therefore do simple multiplication like this:

Retirement corpus (C) = Years left to retire (Y) * Annual expense (E)

Corpus that can be reached (C) = Annual savings (S) * Years left to retire (Y) + current investments (V)

Simplifying the two, the current annual savings is sufficient only if

S * Y + V ≥ Y * E or,

S ≥ E - V / Y or,

Annual Savings ≥ Annual Expense - Corpus saved / Years left

If you do not have sufficient corpus saved, saving only 20% will be insufficient. If you are starting, be aware that saving less than what you should means that you will miss your goals. Therefore be mindful of this limitation when you are applying the rule.

What should the investor do instead?

We all look for thumb rules that simplify our lives. However, there might be better things to do in some cases, given your unique personal situation. Therefore it is better to learn the frameworks that work for all investors and apply them to your need. Here are some resources that will help in this matter:

What's next? You can join the Arthgyaan WhatsApp community

You can stay updated on our latest content and learn about our webinars. Our community is fully private so that no one, other than the admin, can see your name or number. Also, we will not spam you.

To understand how this article can help you:

If you have a comment or question about this article

The following button will open a form with the link of this page populated for context:

If you liked this article, please leave us a rating

The following button will take you to Trustpilot:

Discover an article from the archives

Worked out case studies for goal-based investing

Case study: how can this middle-aged investor with two children plan for retirement and children's goals?

This article shows how a single-income middle-aged couple with two small children reach their retirement and children’s goals.
Case study: can this double income single kid family reach FIRE at 50?

This article shows how a double-income couple with a 2-year old reach their FIRE dream at the age of 50.
Case study: how a family in their mid-30s with a newborn kid can FIRE and invest in real estate?

This article shows how a double-income couple with a newborn child can invest for their future goals of FIRE and real-estate investment.
Case study: how this double income recently married family can perform DIY goal-based investment planning

This article shows how a young just-married couple can invest for future goals using the Arthgyaan goal-based investing tool.
Case Study: How should couples in their 40s with a new baby plan their financial future?

Did you welcome a bundle of joy in your 40s? This article will discuss ways of planning the child’s (and your’s financial future)
Case study: how this double income single kid family can perform DIY goal-based investment planning

This article shows how a very typical salaried couple with one child can invest for future goals using the Arthgyaan goal-based investing tool.

Previous and next articles:

Retirement

How much returns should you expect from your retirement portfolio?

This article shows you the total expected returns for your retirement portfolio from the day you start investing for retirement to the day you stop drawing down from it.

Published: 11 December 2022

10 MIN READ

<p>This article shows the historical performance of applying goal-based investing principles to single payment goals in India and whether it has worked for reaching the desired corpus.</p>

Portfolio Construction

Goal-based investing: does it work in India?

This article shows the historical performance of applying goal-based investing principles to single payment goals in India and whether it has worked for reaching the desired corpus.

Published: 18 December 2022

3 MIN READ

Latest articles:

<p>This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.</p>

Portfolio Construction

How much lower portfolio value do you end up with if you do not invest for a few years in between?

This article shows how to understand the impact on your portfolio if you stop investing for a few years between today and retirement.

Published: 24 April 2024

4 MIN READ

<p>This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.</p>

House Purchase

Should you withdraw from your EPF to buy a house?

This article explains what happens if you withdraw from your EPF to buy a house and who should or shouldn’t withdraw from EPF for this reason.

Published: 21 April 2024

7 MIN READ

Topics you will like:

Asset Allocation (21) Basics (8) Behaviour (12) Budgeting (12) Calculator (25) Case Study (6) Children (17) Choosing Investments (40) FAQ (12) FIRE (13) Gold (21) Health Insurance (5) House Purchase (29) Insurance (16) International Investing (12) Life Stages (2) Loans (17) Market Data (7) Market Movements (16) Mutual Funds (46) NPS (7) NRI (19) News (18) Pension (8) Portfolio Construction (53) Portfolio Review (27) Reader Questions (8) Real Estate (7) Research (5) Retirement (38) Review (15) Risk (6) Safe Withdrawal Rate (5) Set Goals (28) Step by step (15) Tax (59)

Next steps:

1. Email me with any questions.

2. Use our goal-based investing template to prepare a financial plan for yourself.

Don't forget to share this article on WhatsApp or Twitter or post this to Facebook.

Discuss this post with us via Facebook or get regular bite-sized updates on Twitter.