10 financial planning rules to manage money in your life: Both individuals who are just starting their financial planning as well as those who are in the middle of their careers but do not yet have a proper plan in place can follow these guidelines.
Pay yourself first
This means that before you spend money from your monthly salary, a specific amount must be saved. The golden rule should be “Income less savings equals expenses.” Find out how much money you need to save for these goals by first identifying them, estimating the inflation-adjusted money requirement, and then determining the amount. After that, make sure that money is deducted from your paycheck each month for your goals, and use the remaining money to pay your bills.
How much should you save
For someone starting their career at the age of say 25 years, 10 per cent of the post-tax income can be saved. Over time, as your income increases, up this number to 15 per cent. As you grow older and your income rises and financial liabilities too add up, make sure you are saving enough towards your goals. By the time you are in your 40s, save at least 35 per cent of your post-tax income.
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Rule 20/4/10
This rule helps keep your finances under control when you’re buying a new car. Here, 20 stands for the down payment amount, i.e., 20 per cent of the car price should be paid by you. However, it is better to make as much down payment as possible. Four stands for the number of years of financing. Although lenders have a tenure of up to 7 years, it’s better to stick to 4 years. 10 stands for the ideal percentage of your net-take home salary that should go towards the car loan EMIs.
Rule 50-20-30
You can use this rule to determine your monthly savings and spending goals. In this case, 50% of your income should be allocated to living expenditures, such as rent or mortgage payments and groceries, 20% to savings for your short-, medium-, and long-term goals, and 30% to spending, such as entertainment costs, dining out, and travel. You can adjust the percentages based on your age, situation, etc.
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Have an emergency fund
Anytime an emergency arises, action must be taken right away. Your emergency fund serves as a safety net and is not intended to help you achieve your predetermined objectives. Although there isn’t a set amount that one must have on hand for emergencies, one’s emergency fund should ideally be equivalent to three to six months’ worth of living expenses.
Life insurance
Your life insurance coverage should ideally be at least 10 times your annual salary. The actual amount needed, however, may vary depending on your age, financial objectives, dependents and wealth, etc. A pure term insurance plan is the most economical option to purchase life insurance. A low-cost, high-coverage protection plan known as a “pure term plan” allocates all of the premium to risk coverage. There is no savings component of the payment, so if you survive the period of the life insurance policy, you won’t receive anything.
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Save for retirement
Most financial planners suggest a retirement corpus target that is about 20 times your annual income. While some feel that 30 times can be a better figure as it will take care of inflation. It gives you a reason to work backward and estimate how much you need to save from today till the time you retire. However, before using this rule, do note two points. First, this rule only considers income and not expenses. Second, it may work better for those whose retirement is years away than those who ar ..
How much home loan to take
Banks and other lenders won’t make a loan if the EMIs would exceed 45 to 50 percent of the borrower’s monthly take-home pay, including any current EMIs on personal or cars. The house loan’s monthly EMI should not exceed 30% of gross monthly income. In a perfect world, monthly income should not exceed 50% of the total EMI commitments (including home and other debts). Make sure your credit score is at least 750 to qualify for the best deals.
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Invest in equity
When making equities investments, the ‘100 minus age’ strategy is frequently recommended. A 30-year-old should invest 70% of his investable excess in stocks and the remaining 30% in loans. Additionally, when one becomes older, less money should be put into stocks. Being aggressive in the stock market until at least three years before retiring will help with long-term goals like retirement.
How to diversify
You don’t need more than four to six schemes to diversify your portfolio. If you are investing a small amount, you don’t need to invest in more than one or two schemes. Investing in every mutual fund category will not offer you the best return or diversification. Have a focused portfolio in line with your goal, horizon, and risk profile – this is extremely important if you are investing a small amount.
However, keep in mind that there isn’t a “one size fits all,” as these guidelines only offer a broad overview and could not always give you the full picture.
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