What Is The ⅓ Rule In Finance?

One of the most important factors that individuals consider while looking for a residential place is affordability. Most personal financial experts contend that there is a maximum amount you should spend on housing. According to what is known as the “One-Third Rule,” you shouldn’t spend over one-third of your income on rent.

After paying for accommodation, you’ll have enough money left over, using a third of your budget to cover other necessary costs like food, petrol, savings, and social engagements.

Understanding the One-Third Rule

The one-third rule provides an approximation of how changes in capital will affect labor productivity and effectiveness. In other words, this rule makes it possible to predict how changes in capital or technology will impact production levels.

  • According to the one-third rule, if there are changes in human capital for every hour
  • A higher quality of living in the economy is shown if a worker produces more goods and services in an hour.
  • It may be challenging for countries with low participation rates to increase their labor force.

Calculations with the One-Third Rule

The one-third rule determines how labour or technology affects the nation’s productivity. For instance, if the labour is used for one hour over a certain period, a commercial firm’s capital increases by 6%. It indicates that labour costs are higher and that the organization’s physical capital has also increased by 6%. One can apply the formula for percentage increase in productivity, which adds the percentage increase in physical capital divided by labour hours and percentage increase in technology, to determine that the 4% gain in productivity was the consequence of improved technology.

Here are some simple rules that you need to follow when it comes to financing:

Emergency savings

As the name implies, an emergency can occur anytime and calls for prompt action. Due to a temporary disability or several months of unemployment, one’s ability to earn money may suffer. When the settlement claim takes time, a medical emergency can arise, or the illness might have a waiting period. It could be necessary to make financial arrangements by making investment in mutual funds to get by in certain situations. Certain cash outflows, such as paying home bills or keeping an EMI promise, are sacred. The purpose of an emergency fund is to serve as a safety net rather than to help you achieve your planned objectives.


Life insurance

Ideally, it would help if you got a life insurance policy that covers at least ten times your yearly salary. The real requirement, however, may vary depending on a person’s age, ambitions, dependents, wealth, etc.

A pure term insurance plan is the most economical option for purchasing life insurance. It is a low-cost, high-coverage protection plan where all of the premium is used for risk coverage or to cover the danger of death. As there is no savings component of the premium, one receives nothing if they survive the period. However, given that it is one of the fundamental requirements in one’s overall financial plan, no one should be discouraged from purchasing a term plan as risk cover through life insurance.

Bottom Line

Although there isn’t a set amount for emergency funds, one’s emergency fund should ideally be equivalent to three to six months’ worth of living expenditures. You should be able to deal with any financial emergencies with the money. You should start investment in SIP to avoid future financial risk.

However, since this criterion only considers revenue rather than expenses, you might be disappointed. It might also be more effective for people whose retirement is years away than for those close to retiring.

There isn’t a method that works for everyone. Your financial condition needs to be tailored to your risk profile, circumstances, etc. Once you’ve begun applying the thumb rule, it’s crucial to check your progress and adjust your approach as necessary periodically.