The process of financial planning needs due diligence at each step to evidently lay out the expense, income and aims based on the risk taking capacity of an individual. We have all heard about the salary rule of thumb, but have you heard the same with finance? If not already, here are 6 personal finance thumb rules that you may use to bring your personal finances on track.
Once you have accustomed to the rule, effective financial planning exercises can be implemented to bring savings in accordance with your goals. So, let us get into 6 personal finance thumb rules. If you are wondering what is a good “rule of thumb” for how much you should save, then you would surely find the answer in this article.
6 Personal Finance Thumb Rules To Follow Now
Following several personal finance rules can sort out all your finances broadly. Thumb rules may not always offer you an accurate image but can navigate you in the right direction as they are generally time-tested processes. They are something that can be learned easily, remembered, and also applied.
Here are 6 very famous and effective personal finance thumb rules that you can follow for sorting out your money crisis. Without any further, let us begin.
1. Income Minus Savings Equals To Expense
From the very first day, you begin to earn, ensure that you keep aside a percentage of your income as savings. Now, after that plan your discretionary and also the nondiscretionary expenses from the balance. No matter how little is your savings, start early and make this your habit.
The thumb rule here is “Income minus savings is your expense”. If you already have your aims listed, find out how much is needed to attain them and keep savings regularly towards it. Those who are not ready to follow this rule will first spend and save and that is not at all a good practice.
2. How Much To Save
Irrespective of your salary or the business income that you earn, keep aside a percentage towards savings. You can initially begin with 5% and then move to 25% or even 30% based on the hike in your salary. With age as aims become more prominent, your savings will have to rise as well. During your middle age, you will have to save a greater percentage than you would at your starting age. Remember, by savings here we mean putting your money into a high yielding financial avenue and not merely keeping it in your bank account. This is a great savings rule of thumb by age.
3. Emergency Fund
Even before you begin to invest, ensure that you have sufficient emergency funds. As a personal finance thumb rule, keep an amount that is equal to at least six months of expenditure in a mixture of a savings account and a long term and deposit fund.
This fund will help you to tide over financial emergencies like job loss or medical emergencies needing upfront cash.
4. Life Cover
As among the personal finance thumb rules, one should have a life coverage of 10 to 15 times of one’s take home annual income. This will help the survivors in maintaining their living standard in the absence of the bread earner in the family. Other liabilities like home loans and many more requirements are accounted for additionally.
5. How Much To Save For Retirement?
There is no prominent rule, but as a part of the important personal finance thumb rules, one may aim for a retirement target corpus of a minimum of 20 to 30 times of the annual income of an individual to retire comfortably. Again, this may depend on the need of an individual but having a plan and making the savings towards it will eventually help retire with sufficient money.
6. The 35% Rule
Some loans such as educational loans or home loans are good loans, while there are bad debts as well like credit cards. Credit card dues may put a heavy strain on your finances. So as a thumb rule, EMI as a portion of your income should not exceed 35-40%. Anything above that might put a strain on your finances. In case your running EMI is more than that, then you should avoid taking more loans. This is among the most effective financial planning rules.
Personal finance thumb rules are meant to operate on wide guidelines. According to Anant Ladha, founder, of Invest Aaj For Kal, a financial planning firm,