Financial planning process requires due diligence at every step to clearly lay out the income, expenses and goals based on one’s risk taking capacity. However, there are certain thumb rules that one may use to bring the personal finances on track. Once accustomed to the rules, proper financial planning exercise can be conducted to bring savings in line with the goals.
Here are five important thumb rules to help you make better financial planning decisions
Income minus savings equal to expenses
From the day you start earning, make sure you set aside a portion of your income as savings. Now, plan your discretionary and non-discretionary expenses from the balance. No matter how little you save, begin early and make saving a habit.
The rule is ‘Income minus savings is your expense’. If you already have your goals listed-out, find out how much is required to achieve them and keep saving regularly towards it. For those who do not follow this rule, will spend first and then save whatever is left for the long term goals. Avoid such a practice.
How much to save
Irrespective of the salary or business income you earn, set aside a portion towards savings. You can start with 5 per cent and over time increase it to a higher percentage of even 25 or 30 per cent of income. With age as goals become more prominent, your savings have to increase. During middle age you need to save a higher percentage and can try to save the maximum amount. Remember, savings here refers to putting your money into high yielding financial products and not merely keeping it in a bank account.
Even before you start to invest, make sure you have adequate emergency funds. As a thumb rule, keep an amount equal to at least six months of expenditure in a mix of savings account and short term or liquid funds. This will help to tide over financial emergencies such as job loss or a medical emergency requiring upfront cash.
As a thumb rule, one should have life coverage of 10-15 times of one’s take-home annual income. This will help survivors to maintain their standard of living in the absence of bread earners in the family. Other liabilities such as home loan etc need to be accounted for additionally.
How much to save for retirement
There’s no fixed rule but as a thumb rule, one may aim for a retirement target corpus of 20-30 times of one’s annual income to retire comfortably. Again, this may vary as per one’s requirement but to have a plan and save towards it will eventually help retire with enough money.