10 Easy Thumb Rules for Effective Financial Planning
Effective financial planning is like having a guiding light in your journey of investments and savings . These thumb rules can serve as invaluable signposts for those embarking on their financial planning journey or those seeking to refine their existing strategies. However, it's important to remember that financial planning is not a one-size-fits-all endeavour; these rules provide a general direction rather than an exact roadmap.
1. Pay Yourself First
One of the fundamental principles of financial planning is to prioritize saving before spending. Implement the 'Income minus savings equal to expenses' rule. Define your goals, estimate the inflation-adjusted money required, and calculate the amount needed to achieve these goals. Allocate funds from your salary to your goals each month and manage your household expenses with the remaining amount.
2. Determine Your Savings Percentage
For beginners, allocating 10% of post-tax income towards savings is a prudent starting point. As your income grows, gradually increase this allocation to 15%. Adjust your savings as your financial responsibilities evolve. By your 40s, strive to save at least 35% of your post-tax income.
3. The 50-20-30 Rule
This rule offers a balanced approach to budgeting. Allocate 50% of your income to living expenses, such as groceries and household costs. Devote 20% to various savings goals spanning short, medium, and long-term needs. The remaining 30% can be allocated to discretionary spending like entertainment and dining. Personalize the percentages based on your age and circumstances.
4. The 20/4/10 Rule for Car Purchases
When purchasing a car, adhere to the 20/4/10 rule. Put down a minimum of 20% of the car's price as a down payment. Limit the financing period to four years, despite the availability of longer loan terms. Additionally, ensure that the car loan's monthly EMI doesn't exceed 10% of your net take-home salary .
5. Building an Emergency Fund
An emergency fund is essential for unexpected situations. This fund should cover 3-6 months' worth of household expenses. It's important to distinguish between emergency funds and planned savings for goals. The size of your emergency corpus can vary based on individual circumstances.
6. Calculating Life Insurance Coverage
Aim for life insurance coverage that is at least 10 times your annual income. This multiplier might vary based on factors like age, financial dependents, and personal financial goals. Consider cost-effective term insurance plans that provide high coverage at affordable premiums.
7. Setting Retirement Savings Goals
Financial planners often suggest a retirement corpus equivalent to 20-30 times your annual income. This range provides a safety net against inflation and changing lifestyle needs. Factor in both income and expenses while determining your retirement savings target.
8. Smart Home Loan Management
When taking out a home loan, ensure that your monthly EMI remains within 30% of your monthly income. The total EMI obligations, including other loans, should ideally not exceed 50% of your monthly income. A strong credit score (750 and above) enhances your loan terms.
9. Equities Allocation by Age
The '100 minus-age' approach can guide your equity investments. Allocate a percentage equivalent to your age to debt instruments and the rest to equities. Adjust this allocation as you approach retirement, gradually reducing equity exposure.
10. Diversification Strategy
A focused portfolio consisting of four to six schemes can ensure diversification. Avoid investing in multiple mutual fund categories, as this may not yield optimal returns. Align your portfolio with your goals, risk profile, and investment horizon.
In the complex landscape of financial planning, these thumb rules provide valuable starting points for individuals at all stages of life. Tailor them to your unique circumstances, and consider seeking professional advice to refine your strategies for a secure financial future.