We are sharing 9 golden rules of personal financial management relevant today that can considerably improve your complete financial well-being, making you financially independent and prepared for your future.
- 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, household expenses, etc. (50%), discretionary expenses such as eating out, shopping, entertainment, etc. (30%), and minimum savings & investments (20%).
This ratio is ideal at the start of your working life. As your income grows, you should gradually flip your savings from 20% to 30%. As you age and your fixed expenses fall, your savings ratio should move from 30% to 50%, helping you secure your retirement.
- THE 20x INSURANCE COVER RULE:
If you are buying a Life Insurance Policy (LIP), make sure that your sum assured can take care of your family’s income needs for the long term. The sum assured should be at least 20 times your current annual income, or more if you can afford it.
- PAY YOURSELF 10% RULE:
You are in debt to your future self. Make sure you clear this debt on priority each month without fail. Your retired self depends on you for his income.
You should invest at least 10% of your monthly income in long-term investments such as equity mutual fund SIPs (Systematic Investment Plans) in order to secure your retirement. If you plan to retire early, invest more than 10% in such long-term investments.
- THE 3x EMERGENCY FUND RULE:
You must always own an emergency fund that’s at least 3 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 fund will keep you remain financially stable in emergencies such as pandemic, loss of employment, urgent travel, health emergencies, etc.
- THE 6% RISK-FREE RETURN RULE:
The rate of return in SBI five-year term deposits is 5.4% (taxable) and on tax-free bonds issued by government owned companies is 4.5% (tax-free). This can be the safest possible investment considered as the risk-free rate of return today in India.
Before you make any long-term investment, ask yourself: Will it pay you at least the above-mentioned returns? If not, reconsider your decision to invest. If your investment cannot beat the risk-free rate of return, then it may not be worth your while.
- 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 which can be used as a point of reference, while the actual rental yields may vary wildly from one location to another.
- THE 30% CREDIT LIMIT RULE:
Try to keep your credit utilization ratio (the percentage of your credit limit you are using) to 30% for any month. For example, if your credit card limit is Rs 1 lakh, try to limit your credit card spending to Rs 30,000, which is 30% of the credit available. This will also help improve your credit score.
- THE 20% HOME BUYING RULE:
Any time you buy a property, you are going to pay at least 20% of the property cost from your own pocket. Banks will typically finance up to 80-85% of the property purchase value, while you may need to fork out 20-30% more of it for the costs of stamp duty & registration, furnishing& repairs, etc.
- THE 40% EMI RULE:
All your Equated Monthly Installment (EMI) combined from all borrowings should ideally be not more than 40 % 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. Crossing this limit may strain your finances, lower your savings, and run the risk of defaulting on your EMIs.
These are rules of thumb — the most basic guidelines to better manage your money in the current times. Depending on the market scenario and your life stage, income level, life priorities, financial backing, risk appetite, etc. you may have to revisit and fine-tune these rules to achieve the best results.
CONCLUSION:
These are rules of thumb — the most basic guidelines to better manage your money in the current times. Depending on the market scenario and your life stage, income level, life priorities, financial backing, risk appetite, etc. you may have to revisit and fine-tune these rules to achieve the best results.
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