Do you feel like your money disappears the moment it comes in? Most people pay bills, spend on what they enjoy, and then save whatever is left. But that’s the problem. Saving what’s left doesn’t work.
To build wealth and achieve financial freedom, flip the order.
Save first. Spend later.
Step 1: Use a smart budgeting rule
Start with a budgeting rule that’s simple and helps you save.
The 50-30-20 rule:
- 50% for Needs – rent, groceries, bills
- 30% for Wants – eating out, shopping, movies
- 20% for Savings and Investments
But in real life, 30% on wants is too generous and leaves too little for long-term goals.
Here’s a better version: the 50–25–25 rule.
If you earn ₹1,00,000 a month:
- ₹50,000 for needs
- ₹25,000 for wants
- ₹25,000 for savings and investments
It’s not just about how much you spend, but the order in which you do it.
Always follow this: Needs → Savings → Wants.
If you save first and fall short later, you’ll skip a meal out, but your future won’t suffer. That one change can move you closer to financial freedom.
Step 2: Build an emergency fund
Before you invest, set up an emergency fund. This is the backup when life throws challenges your way—job loss, health emergency, or unexpected expense.
Aim to cover at least 6 to 9 months of essential expenses.
If your monthly needs are ₹50,000, build an emergency fund of ₹3,00,000 to ₹4,50,000.
Where should you save this money?
Not in your regular savings account, as it’ll get mixed up with daily spending.
Not in a fixed deposit, as breaking it early may mean penalties or delays.
- Auto-sweep account: Anything above a set limit moves into a fixed deposit. You get better interest and access to funds when needed.
- Liquid mutual fund: Low-risk, short-term debt instruments. Offers higher returns than a savings account and allows withdrawal within one working day.
Pick whichever suits you. Your emergency fund should be separate, safe, and easy to access.
Step 3: Get health and life insurance
Most people have motor insurance because it’s legally required, and accidents can be expensive. But your car is replaceable. Your health isn’t.
Health insurance is non-negotiable.
For an individual, a ₹10 lakh cover is a must.
For a family, aim for ₹20 lakh or higher.
Then comes life insurance, only for earning members of the family.
Most people end up with endowment, ULIPs, or money-back policies or investment products with poor insurance coverage.
What you need is pure term insurance.
High coverage at a low cost. No investment angle, just protection.
If something happens to you, a term plan ensures your family gets a large payout to cover expenses, clear loans, and maintain their lifestyle.
Your life cover should be 20 to 50 times your annual income.
If you earn ₹12 lakh a year, aim for at least ₹2 crore in life cover. A term plan for that can cost around ₹2,000 per month.
Step 4: Pre-pay expensive loans
Once your emergency fund is sorted and insurance is in place, focus on getting rid of high-interest personal loans, credit card dues, and car loans.
There’s no benefit in investing for a 12% return while paying 10% to 15% on debt. Even if your investments earn slightly more, the risk, taxes, and market volatility make it unreliable. Loan interest is guaranteed and compounds steadily, eating into your net gain.
Step 5: Start investing for your goals
Investments are of two types: low to medium risk and high risk.
Low and medium-risk investments are ideal if:
Your goals are short-term to medium-term
- Sukanya Samriddhi Yojana (SSY): If you have a daughter under 10 and you’re planning for her education or marriage, the Sukanya Samriddhi Yojana (SSY) is for you.
- Public Provident Fund (PPF): Idea for long-term savings. Safe, tax-free interest with a 15-year lock-in.
- National Pension Scheme (NPS): For retirement, and has a lock-in till 60 years of age. Up to 20% early withdrawal after three years for specific reasons.
- Senior Citizen Savings Scheme: Ideal for those 60 or older. It offers better post-tax returns than fixed deposits with low risk and a quarterly income.
To make financial planning simpler, you can use Finology Recipe. It is a free tool to plan, track, and achieve goals like buying a house or securing retirement.
Enter a few details, and Finology Recipe shows if your goals are achievable within your timeline. It calculates how much to invest monthly and helps you prioritise multiple goals based on income, savings, and spending.
With Finology Recipe, you get clarity and control to make smarter decisions.
Now, high-risk investments:
If your financial goals are 10 to 15 years away, and you’re in for the long term, mutual funds and stocks are for you.
Start with Mutual Funds.
Why? Mutual funds offer market growth potential without needing to pick and manage individual investments.
Whether equity, debt, or hybrid, you can choose based on your risk comfort and time frame. Mutual Funds are managed by professionals and are diversified, tax-efficient, and SIP-friendly.
Once you’ve set up your emergency fund, insurance, and mutual fund investments, and still some surplus is left, invest in stocks.
Stocks carry a higher risk but also offer higher potential returns. Since it’s surplus money, short-term market swings won’t affect your lifestyle. If markets do well, stocks can help you build wealth.
Here’s a quick summary of all the investment options we’ve discussed, covering risk, taxation, suitability, and expected returns.
Conclusion
Financial freedom doesn’t come from high income or quick gains. It comes from getting the basics right in the right order, month after month.
Spend smart using the 50–25–25 rule, build your emergency fund, get insurance, clear high-interest debt, and invest with discipline.
Finology is a SEBI-registered investment advisor firm with registration number: INA000012218.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.
