Personal finance

Five rules to follow when it comes to personal finance

There are a few rules of thumb that can help your finances in general. Rules of thumb may not always give you an accurate picture, but can point you in the right direction as these are usually proven processes. It is something that is easy to learn, remember and apply.

“Rules of thumb help streamline our finances. Basically, when we form a ruler and follow a proven process, our likelihood of achieving financial freedom increases, ”says Anant Ladha, founder of Invest Aaj For Kal, a financial planning firm.

Here are five popular basic personal finance rules you can follow to tune your financial life. However, make sure they suit your personal situation instead of blindly following them.

1. Maintain an emergency fund equivalent to 6 months of your salary: You know how important it is to create an emergency fund. He always comes to the rescue when you are in crisis. This should include regular expenses, EMIs, and your insurance premiums.

Although six months is the general rule, it differs from case to case. For example, those with secure jobs can benefit from three months of emergency cash, while the self-employed or freelance workers, who face greater uncertainty, can save expenses that can last up to ‘to one year.

2. Take out term insurance 10 times your annual income: The purpose of life insurance is to replace the income of the insured in the event of an unfortunate death. While there are ways to calculate your insurance needs, the general rule is that you should buy life insurance that is equivalent to at least 10 times your annual income.

It is recommended that you buy a fixed-term plan because these plans offer higher coverage at a lower premium.

3. The rule of 100: This rule of thumb suggests that the equity percentage in your portfolio should be 100 minus your age. So, at age 30, the share of equities in your portfolio should be 70%. At 40 it should be 60% and at 50 it should be 50%, and so on. This rule of thumb is based on the fact that equity investments generate good returns over a longer period of time, as market volatilities balance out. So, at the start of your career, you should have a higher proportion of stocks and reduce your exposure to stocks as you approach retirement.

4. The 35 percent rule: Some loans like home loans and education loans are good loans. However, other debts like credit card dues can put a strain on your finances. Generally, the EMI as a percentage of your income should not exceed 35 to 40 percent. Anything beyond that could put a strain on your finances. If your EMI is higher than that, you should avoid taking more loans.

5. The rule of 72: This rule of thumb gives you an indication of how long it will take you to double your money when you invest in a certain instrument. He says 72 divided by the rate of return is the time it takes for your money to double. So if your rate of return is 8%, your money will double in nine years, and if it’s 12%, it will double in six years. Remember, it’s important to earn a rate of return that is higher than inflation. Plus, where you invest depends on your appetite for risk and how long it takes to reach a certain goal.

Rules of thumb are meant to act as general guidelines and are not meant to be followed until departure. “It’s important to remember that everyone is unique. Sometimes, depending on your financial situation, certain adjustments need to be made and that is totally acceptable. Sometimes you can also stray from the goal and try to get back on track, ”says Ladha.