Financial Planning Thumb Rule

 Financial Planning Thumb Rule

 

These thumb rules are very basic they only provide a general direction and may not necessarily give you the exact picture. These are broad guidelines and you may need to adjust them as per your requirement. The thumb rules for financial planning:

 

First rule

The first rule of personal finance is “Pay yourself first”, i.e., your goals. It means that out of your monthly income save a certain percentage of amount for your goals.

 

Equity Allocation

Many factors determine asset allocation. But the most common rule of thumb is used in the investment says equity percentage in the portfolio should be equal to 100 minus your age. So for a 40year old, 40 percent of your investments are in debt and 60 percent (100-40) in equity.

 

Emergency Fund

An emergency fund is a must for any household. There’s no fixed rule on how much emergency cash one would need. Ideally, 3-6months of household expenses should be one’s emergency fund.

Retirement Corpus

Retirement planning is an essential financial goal. The retirement corpus target is about 20 times one’s annual income. If you take care of inflation 30 times can be a good amount.

Life Cover

One should ideally have a life cover that is at least 10 times of your annual income. Buying a term plan as risk cover through life insurance it is one of the basic necessities in one’s overall financial plan.

Home loan

As a thumb rule, EMI should not exceed 40 percent of your take-home pay. It should be lesser when you are close to retirement.

House Price

The value of a house should be equal to 2-3 times your family’s annual income. Don’t go overboard when applying for a home loan. One can figure out the worth of the house that one can afford to buy. So if your annual income is 10 lakhs, you should buy a house in the range of Rs 20-30 lakhs.

Buying a car

If you are availing of a car loan, follow the 20-4-10 rule. Wherein 20% should be down payment, loan tenure is not more than 4 years, and the EMI on the car is not more than 10% of your total annual income.

Rule of 72

It’s a simple and most common rule. If you divide 72 by the rate of return you will get the number of years in which your money will double. If you expect a rate of return of 8% your money will double in (72/12=9) 9 years.

 

Your finances need to be personalized according to your risk profile. These are broad rules and what works for someone else may not necessarily work for you. Do thorough research before making any kind of financial investment. If you know some other rules of thumb related to finance – please share.