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The 4 3 2 1 Rule

A long time ago the 50 30 20 rule to savings became popular in countries like the United States of America and became the benchmark for Financial Planners for a long time. With new products in the market and taking account of inflation along with the uncontrolled rise of education and medical fees, the 50 30 20 rule seems to have become difficult to follow. In India, because of the changes in cost of living and understanding PPP (Purchase Power Parity), rule the 50 30 20 rule of budgeting could not be applied for the everyday earner.

After years of research and multiple studies done in India, The new trend seem to be segregation of the net income into 4 segments – 40%, 30%, 20% and 10%. This is what led to the 4 3 2 1 rule and seems to work in modern times.

So What Exactly is the 4 3 2 1 rule?

The 4 segments of the income breakup boils down to Basic Expenses, Insurance and Investments, Accessible Funds and Entertainment as described in the chart

While this definitely takes discipline any Financial Advisor would tell you that the only way to securing financial goals is to be strict with your money.


Basic expenses obviously take up a large chunk of the income. In this case it’s 40%.

40% may seem like a very large number however studies show that over more than two thirds of working class professionals in India spend over 85% of their income on absolute basics. If your expenses cost you 85% or higher of your net income, you are one of the two thirds of the working population that are stuck in ‘hand to mouth’ living. This can be a very dangerous way to live as it doesn’t allow you to be financially prepared in case of untimely events or emergencies.

  • Rent/House Loans
  • Groceries/Food
  • Clothing
  • Electricity Bills
  • Telephone Bills
  • Vehicle Rental/ Vehicle Loan
  • Vehicle expenses like fuel and servicing
  • Any Other Bills

Insurance & Investments

Insurance is absolutely essential for every human being. As of 2019, 56% of Indians do not have health insurance and a whopping 80% do not have life insurance. That’s about 990 million people who don’t have the feeling of security because of bad financial planning.

Insurance is the process of transferring risk from an individual (insured) to an insurance company (insurer). The segments of insurance covered are Life, Non Life like motor, house..etc.. and Health. Each of these are essential for the everyday earner to lower the burden of risk of unforeseen circumstances. Apart from that, Investments in investment products like ULIP (Unit Linked Insurance Plans), MIP (Monthly Income Plans) and other annuity plans are essential for long term savings.

  • Life Insurance
  • Health Insurance
  • Motor Insurance
  • House & Fire Insurance
  • ULIP (Unit Linked Insurance Plan)
  • MIP (Monthly Income Plan)
  • MWPA (Married Woman’s Properties Act)
  • Retirement Plan
  • Child Plan…etc…

Accessible Funds

Savings is absolutely essential. If you plan your finances well, you should have certain amounts of money locked away in Stocks and Bonds, Mutual and Indexed Funds and other areas too. Usually having some money in crypto currency is advisable however in India, the law is absolutely against it, so as of now it’s safer to stay away from it.

  • Mutual Funds
  • Index Funds
  • Stocks and Bonds


Entertainment is essential for everyone. While saving is great, every now and then we should travel, go out for movies or have other fun activities.

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