Not sure of how much you need for your retirement or if you can really afford the dream house. Then have quick look at these thumb rules, just to know if you are on right track.
2. Ever wondered how much money you should invest in
equities? How much money you required for your retirement? Most
of the money related questions often have complexed answers
which are beyond comprehension for most of the people.
But before you give up, it helps to sit back and do a broad
check to see if you've got your basics in order. This is where general
Thumb Rules can save your time and let you know if you are on
the right track.
These Thumb Rules often used by financial planners/
advisors, to answer our questions. These Thumb Rules are easy
calculation tips which one can use in their daily lives.
So let’s look at these Thumb Rules one by one.
3. Rule I -: Save & Invest at least 25% of your Income
A rule that many people follow is to save and invest 10% of
their incomes. Let us be completely blunt with you - this is not nearly
enough, not even by half.
So if you are Saving 10% - you will be meeting basic needs only.
Saving 15% - it will give you comfortable retirement
Saving 25% - it will give you freedom retiring young.
Remember this: the more you save now, the more your
money compounds. You might have to cut back on discretionary
expenditures to save 25% of your income, but in the end it will be
worth it.
Invest it as according to your financial goals, and as your
income increases, remember to at least proportionately increase
your investments.
4. Rule II -: Keep 3 Month Expenses as Emergency Fund
People generally do the savings for child education or in rare
cases for their own retirement. But whenever any emergency comes
they end up withdrawing money from the investment meant for some
important financial goal.
Just to avoid this undesirable situation, one should at least
have 3 months & going up to 12 months of living expenses as
emergency fund in addition to your savings for other goals.
How much you should save as emergency fund mainly
depends on nature of work , risks & possibilities of finding new
source of income soon.
5. Rule III -: Life Cover should be at list 10 times of current
annual income
One should buy Term Insurance plan to secure his family’s
future in case of his untimely demise. Calculating insurance cover is
quite complex as it should not only cover your loans & liabilities, but
also future household expenses, child education & marriage expenses,
if any.
But as thumb rule, any person having dependents, should
buy Term Life insurance policy which should be at least 10 times
of his current household income.
After consultation with his advisor if he founds that cover
of 10 times is inadequate, then he must go for higher cover.
6. Rule IV -: 20% Down Payment, 40% of Home Loan EMI
According to this rule, while buying home one should put
20% as down payment & avoid to taking a loan where one require
to pay EMI more than 40% of the total household’s monthly
income.
If we can not afford 20% down payment rule, it probably means
we cannot afford that home itself. But when your EMI is not more
than 40% of your monthly income it gives you comfort to save for
your other important life goals simultaneously.
So if your monthly income is Rs. 50,000/- then don’t go for
home loan where you need to pay more than Rs. 20,000/- as EMI.
7. Rule V -: 20 times Income Rule for Retirement kitty
I am sure you must have received message from insurance
companies about get 1Cr at the time of retirement. But are you sure
that 1Cr would be enough for your retirement?
There are many retirement calculators available. But this
simple rule says that it is 20x of your gross total income at the time
of retirement, you would require as retirement corpus or kitty.
So if your annual income at the time of retirement is 10 Lakhs
then you require 2 Crores as retirement kitty.
8. Rule VI -: Pay Highest Interest Loan First
We find many of the people taking various kind of loans & then
caught in debt trap & couldn’t even make decent savings. Before
taking any loan, always check that total EMI; including EMI of
existing loans if any, should not exceed 50% of total monthly
income.
Back to this rule, it points out which loan to be repaid on
priority first – it is one that carries the highest rate of interest.
Usually that order of repayment would be
1. Personal Loan
2. Credit Card
3. Vehicle Loan
4. Home Loan
9. Rule VII -: 20/4/10 Rule of Buying Vehicle
While looking for Auto Loan, one should put down at least
20% as down payment, the loan term should not be more than 4
years & that your total monthly transportation costs (including
EMI) should not be over 10% of your monthly income.
This rule helps you to know whether you can really afford to
buy the vehicle of your choice.
So if your monthly salary is Rs. 50,000/- then you should not be
spending more than Rs. 5,000/- as transportation costs including EMI.
10. Rule VIII -: 80% Replacement Income
Many experts believe one should aim for replacement of
80% of his income at the time of retirement, to live life comfortably
after the retirement. This income would be generated from retirement
kitty investments.
It should not be less than 75% . Having big retirement kitty
would definitely help in reducing the need for non investment income
after retirement.
Ex. If your annual income at the time of retirement is 10 lakh,
then you should target 8 lakh as income from your retirement kitty.
11. Rule IX -: Rule of 69
You might have heard about Rule of 72 which calculate at
what rate of return it will take to double your money. The reason
number 72 is used for this calculation as it is easily divisible by many
denominations. But the real number is 69.
Formula is
Rate of Return = 69 / Number of years to Double Money
So if something doubles your money in 8 years then 69 / 8 =
8.625%. You can use this rule to make comparisons. Stock Market
return of 16% in 5years may not look attractive to the person who thinks
real estate prices have doubled in the same period actually generated
higher returns. But if you calculate actual return for real estate which is
69 / 5 = 13.8% , you will realize it is stock market which outperforms real
estate.
12. Rule X -: 3yrs or less left for your goal, No Equity Exposure
General guide line about stocks investors follow is that your
equity exposure should be (100 – your age). The balance should be in
fixed income instruments.
Age is not the only criteria for financial planning. Better way to
plan for equity exposure is not by your age but by financial goals. Since
market is volatile, it is not going to time according to your needs.
Also you can’t time your needs according to market volatility. For
ex you can not post pone to make the payment of your child education
fees till market goes up.
So if you have goals coming up within the next 3years
avoid equity completely. It is regard less even if market expert say it
is going to double within 2yrs.
13. These are just thumb rules. Results are often
‘Approximate’ & not the exact answers you are looking for . These
are not even meant to bypass financial planners or advisors.
These rules are meant to guide & inform you, before your
meeting with financial advisor. But most importantly it is to protect you
from making huge financial decisions that may end in disaster as
far your financial well being concern.
Just lock these rules in you mind as long as you
following them, you are on right track.
