Dream retirement: Generate a wealthy cash flow and corpus with the 30:30:40 rule!

Why understanding the 30:30:40 formula is good for financial freedom

Imagine achieving financial independence in just 15 years. It might sound too good to be true, but it's possible with the 30:30:40 rule of investing. This rule offers a clear path to financial freedom, and here's why it works:

The 30:30:40 rule is a simple formula that, if followed diligently, can help you become financially independent in 15 years. Let's break it down:

1. 30 per cent for Monthly Expenses: If you earn a monthly salary of Rs 75,000, allocate 30 per cent (Rs 22,500) for your monthly expenses.

2. 30 per cent for EMIs or Extra Investments: Another 30 per cent (Rs 22,500) should be used for EMIs if you have any. If you don't have EMIs, channel this amount into investments, specifically in SIPs (Systematic Investment Plans).

3. 40 per cent for SIP Investments: The remaining 40 per cent (Rs 30,000) should be invested in SIPs.

Now, consider what happens over 15 years if you stick to this plan, assuming an inflation rate of 6 per cent. Your monthly expenses will grow to roughly Rs 54,200 in 15 years. If you invest the remaining 40 per cent in SIPs every month and expect a 12 per cent annual return on your investments, you will have a corpus of approximately Rs 1.51 crore in 15 years.

But what do you do with that corpus once you've accumulated it? You can use a conservative estimate of a 4.3 per cent annual return on your corpus. With that, you can generate Rs 54,200 per month without depleting your initial investment.

The 30:30:40 rule isn't about retiring in 15 years necessarily. It's about gaining confidence that your basic expenses can be taken care of through simple investing in SIPs. Of course, there are other financial goals and lifestyle inflation to consider, which may vary from person to person. This plan focuses on securing your living expenses and financial freedom.

In conclusion, while achieving complete retirement might require more planning and consideration, the 30:30:40 rule serves as a blueprint for securing your basic needs and enjoying peace of mind through SIP investments. By following this rule and embracing the power of compounding, you can take significant strides toward a financially independent future.