10 Rules of Thumb for Financial Planning and Well-being
Regarding financial planning and investment, various areas require attention and financial allocation. It could be having enough money to retire comfortably, owning the home of your dreams, or touring the country on a luxury motorcycle.
Wouldn’t it be beneficial if someone provided you with the best financial planning advice? Or can someone help you make the best financial choices at the right time? Here are the small steps you would need to take to lead a life of economic prosperity.
10 rules to follow for financial planning and well-being
At each stage of the financial and investment planning process, take care to lay out the goals, expenses, and income based on risk tolerance. Here is a list of ten general financial rules of thumb to help you make the best financial decisions at the appropriate time:
Ensure that your EMIs don’t exceed 40% of your take-home pay.
Ensure that the total amount of EMI you pay monthly is at most 40% of your net earnings. They are commonly referred to as “debt-to-income ratios.” Once you request a loan, lenders will ask you about your current debts. It will determine whether approving a new loan fulfils the debt-to-income ratio.
It would ensure that only 40% of your income is used to pay off debt. And you will be able to retain enough money to cover your expenses.
Limit your education loan debt to no more than your anticipated first-year salary.
It may seem out of the ordinary for many of us to pursue our preferred course at a reputable institution. However, they might be worthwhile because they provide a wealth of information and exposure. Given the numerous education loan programmes that banks offer, it is not uncommon to see a student take out a loan for their education.
To keep things simple, only borrow money that won’t be more than your anticipated salary in the first year of employment. If you already work and want to take a break to go to college, keep your loan amount at the same level as your annual salary.
Ensure your desired home price falls within 1-2 times your annual income.
Many of us share the common dream of owning a home, and eventually, that dream will come true. However, when the time comes, be careful not to take on more debt than you can manage.
A smart investment is the one you need. Make sure the value of the home you purchase with a mortgage is at least two to three times your family’s annual income. While at it, consider the different real estate prices and home loan regulations. It might be possible to request a much higher loan amount. Before you proceed with the loan request, consider any unfavourable events that could burden your family severely.
Keep your retirement savings at least 20 times your annual gross income.
Planning for retirement and accumulating funds for your post-retirement lifestyle must be among your financial objectives. Even though retirement may seem far off, it is advisable to start planning early. It is so that the corpus has sufficient time to develop. A great investment strategy is needed for this.
Additionally, to account for inflation, build a corpus that is at least 20 times your gross annual income when you plan to retire.
Learn how to use the “Rule of 72.”
The “Rule of 72” states how to calculate the number of years an investment product will take to double its profit. For this, you must divide 72 by the yearly return on the investment. Try it out for yourself.
Make sure your return is strong enough to offset inflation as well. The greater the return you earn, the less chance there is for your investment to double. With this in mind, we also want to caution you against investing in products you do not fully comprehend. If unsure of the investment product, research it or seek professional assistance.
Have adequate life insurance coverage.
Are you and your family’s primary source of income? If so, you have a great deal of responsibility. It would help if you carried term life insurance equal to approximately 10–15 times your annual income and liabilities to meet these obligations. Making a compromise now could cost you a lot of money later.
Understand the importance of savings.
Set aside some for savings from a portion of your monthly income. You can start with 5% and work up to a higher percentage, perhaps even 25% or 30% of your income. Your savings must rise as your goals become more important as you age. Remember that it doesn’t just mean keeping money in a bank account when we talk about redemption. It also means investing in high-yielding financial products.
Emergency Funds
Ensure that you have sufficient emergency funds before you begin investing. As a rule, keep a minimum of six months’ worth of expenses in a combination of short-term or liquid funds and savings accounts. It will assist in surviving financial crises like loss of employment or a medical issue that requires immediate cash.
On-road costs for a car should not exceed half of the annual income.
If you’re considering getting a car loan, it’s ideal if the car’s on-road cost is at most 50% of your annual income.
Follow the 20-4-10 rule, which states that 20% of the purchase price should go toward the down payment, that the chosen car loan term should not exceed four years, and that the EMI should not exceed 10% of your annual gross income. Put off buying a car if you still need to get the 20% down payment required for a loan.
Investing each month to reach retirement objectives.
You can achieve a simple lifestyle and retirement at 60. It can be a reality by simply setting aside 10% of your income. If you want to retire early, save 20% of your income. You can also opt for an online investment to achieve the goal.
Conclusion
The thumb rules above should be considered when making financial plans. They can provide a strong foundation for long-term wealth accumulation.
Your financial advisor can help you hone your strategy. If you still need to plan, think about the financial goals that working with an advisor can help you achieve. Remember to do extensive research before making any investment.
Look at similar blogs on investments on Piramal Finance’s website. You can also look at the various products and services they offer.