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Mastering Money: 10 Thumb Rules for Lifelong Financial Planning


Last Updated on August 14, 2023 by Sumitha

Navigating the complex world of personal finance can be overwhelming, but having some thumb rules can provide you with a guiding light. These rules serve as general guidelines for individuals at various stages of their financial journey, helping them manage their money more effectively. While these principles offer valuable insights, remember that personal financial situations can vary, so it’s important to tailor these rules to your specific needs.

Financial Planning Thumb Rules

1. Pay Yourself First Ensure that you save a portion of your income before spending it. Embrace the mantra “Income minus savings equals expenses.” Identify your financial goals, calculate the required funds adjusted for inflation, and allocate savings towards these goals. Manage day-to-day expenses with the remaining amount.

2. Determine Your Savings Rate Start by saving around 10% of your post-tax income when beginning your career at 25. Gradually increase this to 15% as your income grows. With age, responsibilities, and income rising, target saving 35% of your post-tax income by your 40s.

3. Follow the 50-20-30 Rule Distribute your income wisely: allocate 50% to living expenses, including groceries and household costs; set aside 20% for savings across short, medium, and long-term goals; and allocate 30% for personal spending, such as entertainment and dining. Adjust these percentages to suit your unique circumstances.

4. Adhere to the 20/4/10 Rule When purchasing a car, remember this rule. Put down 20% as the down payment, opt for a 4-year financing term (avoiding longer tenures), and ensure that your car loan EMIs don’t exceed 10% of your net take-home salary.

5. Build an Emergency Fund Create an emergency fund to address unforeseen expenses. Aim for 3-6 months’ worth of household expenses. This fund acts as a safety net and should be separate from your planned savings.

6. Determine Your Life Insurance Coverage Consider a life insurance policy that covers at least 10 times your annual income. Opt for a pure term insurance plan, which offers a higher cover at a lower premium. This approach safeguards your dependents without an attached savings component.

7. Calculate Your Retirement Corpus Aim for a retirement corpus around 20-30 times your annual income. This ensures your financial security during retirement while accounting for inflation. Customize this calculation to your personal circumstances and expected retirement age.

8. Manage Home Loan Affordability Ensure your home loan EMIs do not exceed 30% of your monthly income. Total EMI obligations, including home loans and other debts, should not surpass 50% of your monthly income. Maintain a credit score of 750+ for favorable loan terms.

9. Allocate Investments in Equities Follow the ‘100 minus age’ approach for equity investments. Allocate around 70% of your investible surplus to equities at age 30, gradually decreasing the equity portion as you approach retirement. Aggressively investing in equities for long-term goals can yield favorable results.

10. Optimize Investment Diversification Diversify your investment portfolio with a focused approach. You don’t need more than four to six schemes for diversification. Tailor your portfolio based on your risk profile, investment horizon, and financial goals.

Incorporate these 10 financial planning thumb rules into your journey, considering your individual circumstances. Remember, while these rules provide valuable insights, it’s essential to customize your financial strategy to meet your unique needs and aspirations.


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