Hi Readers, Another weekend with another new topic. Today I am writing this to give you basic thumb rules to maintain your financial things yourself. Out of these, some rules are already known to some of us but implementation is missing (even me too :p).
~~ Don't run for too much wealth by leaving your health ~~
~~ The first wealth is health ~~ (from emerson's quote)
In this Covid World, you need to be healthy and fit. Please be safe and follow the first rule without any planning. I know what you are thinking, without planning, how can we do a thing? yeah of course but coming to health, we have to.
Coming to planning and execution, we heard about so many ratios like 80% planning, 20% execution. But there is no such magic ratio for planning and execution. it all depends on individual's comfort, knowledge and experience.
Ok, it is enough for health, let me take you to main course of this article i.e., Financial thumb Rules.
First rule of this article is "THE 8% RULE",
Before you make any long-term investment, ask yourself: will it pay you at least 8% returns per annum after taxes? If not, reconsider your decision to invest. The benchmark refers to returns from small savings schemes such as the Public Provident Fund, which currently provides tax-free returns of 7.9 per cent per annum on investments up to Rs 1.5 lakh per year. If your investment can't beat PPF, then it may not be worth your while.
PAY YOURSELF 10% RULE :
You are in debt to your future self. So make sure you clear this debt on priority each month without fail. Your 60-year-old self depends on you for his income. You should invest at least 10 per cent of your monthly income in long-term investments such as equity mutual fund SIPs and PPF in order to secure your retirement. Want to retire early? Invest more than 10 per cent.
THE RULE OF 100 :
This is the rule suggests that the percentage of equity in your portfolio should be 100 minus your age. So, when you are 30, the equity portion of your portfolio should be 70 per cent. When you are 40, it should be 60 per cent and when you are 50, it should be 50 per cent, and so on. This thumb rule is based on the fact that equity investments deliver good returns over a longer time period as market volatilities even out. So at the start of your career, you should have a higher proportion in equity and reduce your equity exposure as you near retirement.
THE 3% RENTAL YIELD RULE :
A property you own should generate an annual rental yield of at least three per cent of the property purchase cost. For example, if property costs Rs 50 lakh, your annual rent should be at least Rs 1.5 lakh. This is a loosely applied thumb rule, and the actual rental yields may vary wildly from one location to another. But a good point of reference nevertheless.
THE 3X EMERGENCY FUND RULE :
You must always own an emergency fund that's at least three times your current monthly income. That's the bare minimum. You can go up to six months and keep building if you feel the need to do so. This is up to you. This fund will keep you financially stable in emergencies such as loss of employment, urgent travel, repairs, etc.
THE 20X LIFE COVER RULE :
If you are buying life insurance, make sure that your sum assured can take care of your family's income needs for the long term. If you are in your 30s, the sum assured should be at least 20x your current annual income, or more if you can afford it.
THE 20X RETIREMENT FUND:
You should have 20 times your income saved for retirement and plan to replace 80 percent of pre-retirement income. But here retirement means retirement at age of 60 & life expectancy of 80 – and a conservative lifestyle. But now things have changed & you would have dream/planned a lot of things for retirement.
THE RULE OF 72 :
This is the rule gives you an indication of how much time it will take you to double your money when you are investing in a certain instrument. It says 72 divided by the rate of return is the time taken for your money to double. So, if your rate of return is 8 per cent, your money will double in nine years and if it is 12 per cent, it will double in six years. Remember, it is important to earn a rate of return that beats inflation. Also, where you invest would depend on your risk appetite and the time to a certain goal.
THE RULE OF 114 & 144 :
These can help you in how many years your money will be triple (114) or quadruple (144) at some rate of returns.
THE 12/8/6 RULE :
Indian economy is growing at some different pace & even inflation numbers are different. So we can safely say if inflation is 6% (T bill rate) we can get 8% from the fixed deposits & 12% from the equity or in other words – in long term equities will deliver twice the return of inflation? Try combining Rule of 72 with this rule – you will get some amazing numbers.
THE RULE OF 70 :
You know it or not but inflation is our biggest enemy – the rule of 70 will tell you in how many years the value of money will be half. You just need to divide 70 with the rate of inflation so if the rate of inflation is 7% – 70/7=10 years. So in 10 years, your Rs 100 note will be worth Rs 50.
THE 30% CREDIT LIMIT RULE :
Try to keep your credit utilisation ratio (the percentage of your credit limit you are using) to 30 per cent for any month. For example, if your credit card limit is Rs 1 lakh, and if you spend Rs 30,000, your CUR is 30 per cent. Try and stay within this limit, because it will help improve your credit score.
THE 30% HOME BUYING RULE :
Any time you buy property, you are going to pay at least 30 per cent (and normally around 40 per cent) of the property cost from your own pocket. Banks will typically finance up to 80 per cent, while you may need to fork out 30-40 per cent more for the down payment, costs of stamp duty and registration, furnishing, etc.
THE 20/4/10 CAR BUYING RULE :
This is one of the biggest purchases after your home. And this is a depreciating asset – today morning you purchase a car for Rs 10 lakh & by the evening it will be worth Rs 8-9 Lakh. After 5 years it will not be even of half-value but still, you keep buying cars regularly – buy at 10, sell at 4 & lose 6. (repeat the cycle) There are few rules that you can follow: The value of a car should not be more than 50% of the annual income of the owner. Purchase a used car or buy a new & use it for 10 years. While buying a car with a loan stick to Rule 20/4/10 – Minimum 20% down payment, loan tenure not more than 4 years & EMI should not be higher than 10% of your income.
THE 40% EMI RULE :
All your EMIs combined should ideally be no more than 40 per cent of your take-home income. For example, if your take-home pay is Rs 50,000, your combined EMIs should ideally be Rs 20,000. While few would stop you from going over this limit, you will strain your finances, lower your savings, and run the risk of defaulting on your EMIs.
THE 50-30-20 RULE :
This is a ratio which says how much you should spend from your monthly income on fixed expenses such as rent (50 per cent), discretionary expenses such as eating out (30 per cent), and minimum savings and investments (20 per cent).
This ratio is ideal at the start of your working life. As your income grows, gradually flip your savings from 20 per cent to 30 per cent. As you age and your fixed expenses fall, your savings ratio should move from 30 per cent to 50 per cent, helping you secure your retirement.
These are the most basic guidelines to better manage your money yourself. Depending on your life stage, income, and life priorities, you may fine-tune these rules to achieve the best results.
Yeah, this is all from me today. Keep an eye on this blog, you will get more financial plans and knowledge.
Hello, welcome to my blog, Smart Investor. I'm Satyanarayana, a banker & blogger, Investor from Visakha -patnam, India. You can read more about SML here.
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