4-3-2-1 Approach to Financial Freedom (2024)

I speak to clients on a daily basis regarding management of their wealth. One common trend I observe is many people aspire to reach financial freedom at some point in their lives, but most are clueless how to get there. Financial freedom is the point in your life when your work becomes an option rather than a means of survival.

In this article, I outline some broad strategies on how you can get started along this journey towards financial freedom.

The 4-3-2-1 Approach

One simple rule of thumb I tend to adopt is going by the 4-3-2-1 ratios to budgeting. This ratio allocates 40% of your income towards expenses, 30% towards housing, 20% towards savings and investments and 10% towards insurance. While this is by no means a hard fixed rule, it is a useful guide to ensure you are not over-allocating resources towards any one single area while neglecting the rest.

For a young person who has yet to acquire the first property, the 30% for housing can be channeled towards savings and investments or set aside for the eventual down payment or renovation of the house. A person with fewer liabilities or dependents may choose to allocate less towards insurance and more towards savings and investments so they can achieve financial freedom at an earlier age. Allocating 40% of income towards personal expenses is usually comfortable for most without compromising on lifestyle consumption.

Insurance as the foundation

In the overall wealth management strategy, insurance forms the foundation of the financial portfolio. In the event of a major illness or accident, insurance serves as a buffer to prevent your wealth from being wiped out in a single catastrophic event. For hospitalisation and surgical coverage, it is a good idea to explore integrated shield plans offered by private insurers to supplement your basic Medishield Life. These generally offer a more comprehensive cover and provide more options when it comes to treatment.

In terms of life insurance, I tend to recommend between five to ten years of annual income worth of coverage as a guide. This will usually cover you for critical illness, total permanent disability and death. In the event of critical illness, the payout from the critical illness cover will make up for expenses not covered by your hospitalisation and surgical plans while replacing your loss income when you recuperate. In the unfortunate event of death, the death benefit will be paid out to your beneficiaries to take care of your dependents.

This insurance portfolio can be supplemented by accident cover, disability income and early stage critical illness to provide a more comprehensive insurance portfolio. By structuring the portfolio with a mixture of whole life, term or investment-linked policies, most people should have no issues fitting their insurance portfolio into 10% of income.

Generating passive income through savings and investments

For someone who starts out relatively young, allocating 20% of income towards savings and investments is a good starting point to work towards financial freedom. After setting up an emergency fund of about 3 to 6 months of your income, this portion of your income should be channeled towards instruments such as stocks, exchange traded funds (ETFs), unit trusts or endowments to make your funds work harder for you.If you have yet to purchase your first property, it is a good idea to channel the additional 30% from housing into savings and investments. This gives you a head start in terms of accumulating and compounding your wealth.

One of the common issues I face with regard to investment planning is people tend to invest without an idea what they are investing for. This is a concern because there is no time frame and estimation on the amount they are trying to accumulate. There is no way to identify if they are on track towards what they are working for. One key step I try to do is to work out with clients exactly when do they intend to reach financial freedom and how much funds are needed.

Financial Freedom for the Next Generation

If the earlier steps are done right, most people should have more than what they require in their life time at some point. This is when they should look into how their assets are distributed when they are gone. Estate and legacy planning tends to be an after-thought for many people. The common approach tends to be whatever is not spent will be left behind for the next generation. Singaporeans also tend to favour property or real estate as an asset class. What many fail to realise is your best investment can very often be your worst estate plan. In particular, property can be tricky if not handled properly.

For example, in handing down a property with an outstanding loan, one potential issue is if the beneficiaries are unable to take up the loan. They may be left with no choice but to sell the property which may not be the intention of the giver. They may also be exposed to market risks if market conditions are not favourable. Having a well thought out estate plan will go a long way towards mitigating these issues and assisting your next generation to reach financial freedom earlier in their lives.

While I have outlined some broad strokes in managing your wealth and working towards financial freedom, it is important to recognise every individual may have unique circ*mstances which may require different approaches. For specific advice on how to better manage your wealth, do consult a qualified financial adviser to assess your current financial situation.


Royston works with professionals and executives towards financial freedom. He is an accredited Chartered Financial Consultant (ChFC) and Associate Specialist in Estate Planning (ASEP). He is a certified IBF Advanced (IBFA) practitioner by the Institute of Banking and Finance Singapore. Doget in touchif you like to explore how you can work towards financial freedom.

4-3-2-1 Approach to Financial Freedom (2024)


4-3-2-1 Approach to Financial Freedom? ›

The 4-3-2-1 Approach

What is the 3 2 1 rule in finance? ›

A 3-2-1 buydown mortgage offers homebuyers a financing option that can get them into a home despite a high interest rate environment. It offers them a way to save money on monthly loan payments in the first three years of the loan.

What is the 50 30 20 rule? ›

The 50/30/20 budget rule states that you should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be split between savings and debt repayment (20%) and everything else that you might want (30%).

What is the rule of 3 in finance? ›

If you find yourself in this situation, consider the “Rule of Three:” When you have an unexpected windfall, put 1/3 of the windfall towards paying down debt, 1/3 towards long-term saving and investing, and the remaining 1/3 towards something rewarding or fun.

What are the 3 rules of financial planning? ›

Finance experts advise that individual finance planning should be guided by three principles: prioritizing, appraisal and restraint. Understanding these concepts is the key to putting your personal finances on track.

What is the 4 3 2 1 rule in real estate? ›

Analyzing the 4-3-2-1 Rule in Real Estate

This rule outlines the ideal financial outcomes for a rental property. It suggests that for every rental property, investors should aim for a minimum of 4 properties to achieve financial stability, 3 of those properties should be debt-free, generating consistent income.

What is the 10 5 3 rule in finance? ›

It suggests that 10% of your portfolio should be allocated to high-risk, high-reward investments, 5% to medium-risk investments, and 3% to low-risk investments. By following this rule, you can spread your investment risk across different asset classes and investment types, such as stocks, bonds, real estate, and cash.

What is the 40 40 20 budget rule? ›

The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.

Is the 50 30 20 rule outdated? ›

However, the key difference is it moves 10% from the "savings" bucket to the "needs" bucket. "People may be unable to use the 50/30/20 budget right now because their needs are more than 50% of their income," Kendall Meade, a certified financial planner at SoFi, said in an email.

How much should a 30 year old have saved? ›

Fidelity suggests 1x your income

So the average 30-year-old should have $50,000 to $60,000 saved by Fidelity's standards. Assuming that your income stays at $50,000 over time, here are financial milestones by decade. These goals aren't set in stone. Other financial planners suggest slightly different targets.

What is the rule of 4 in finance? ›

One frequently used rule of thumb for retirement spending is known as the 4% rule. It's relatively simple: You add up all of your investments, and withdraw 4% of that total during your first year of retirement.

What is the golden rule of finance? ›

What are the Golden Rules of Accounting? 1) Debit what comes in - credit what goes out. 2) Credit the giver and Debit the Receiver. 3) Credit all income and debit all expenses.

What is the 70 20 10 budget rule? ›

The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.

What is the 60 20 20 budget? ›

If you have a large amount of debt that you need to pay off, you can modify your percentage-based budget and follow the 60/20/20 rule. Put 60% of your income towards your needs (including debts), 20% towards your wants, and 20% towards your savings.

What is the 80 20 budget rule? ›


The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments. Of course, the 80/20 budget rule won't work for everyone.

What is the 33 33 33 rule in finance? ›

So the trick is to put 33% aside for expansion or growth plans; 33% for operational costs; and take 33% for yourself.

What is the 8020 rule in finance? ›


In the 50/30/20 budget, you spend 50% of your income on needs, 30% on wants, and 20% on savings. The 80/20 budget is a simpler version of it. Using the 80/20 budgeting method, 80% of your income goes toward monthly expenses and spending, while the other 20% goes toward savings and investments.

What is the 4 rule in finance? ›

The 4% rule limits annual withdrawals from your retirement accounts to 4% of the total balance in your first year of retirement. That means if you retire with $1 million saved, you'd take out $40,000. According to the rule, this amount is safe enough that you won't risk running out of money during a 30-year retirement.

What is the 4 rule personal finance? ›

The 4% rule is a popular retirement withdrawal strategy that suggests retirees can safely withdraw the amount equal to 4% of their savings during the year they retire and then adjust for inflation each subsequent year for 30 years.


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