Financial Planning Golden Rules: Keep Your Money on Track

Yes, you’ve read it right!

Having a thumb rule to follow in your investment and savings journey can be handy, as it can serve as a guiding light. These thumb rules can be used by those who are just beginning their financial planning. Also, those who are in the middle of their career and don’t yet have a proper plan in place.

However, do keep in mind that there’s no “one size fits all”, as these rules only provide a general direction and may not necessarily give you an exact picture.

With that being said, here are the top financial planning thumb rules you can use in your financial planning journey:

Financial Planning Thumb Rule

How Much Should You Save

For someone starting their career at the age of, say, 25 years, 10 percent of the post-tax income can be saved. Over time, as your income increases, up this number to 15 per cent. As you grow older and your income rises and financial liabilities too add up, make sure you are saving enough towards your goals.

By that time, you are in your 40s, save at least 35 percent of your post-tax income.

50-20-30 Rule

This rule will help you with how much to save and how much to spend in a month.

Here, 50 percent of your income should go towards living expenses, like household expenses and groceries;

20 percent towards savings for your short, medium, and long-term goals;

and 30 percent towards spending, including outings, food, and travel. You can tweak the percentages according to your age, circumstances, etc.

20/4/10 Rule

This rule helps keep your finances under control when you’re buying a new car. Here, 20 stands for the down payment, i.e. 20 percent of the car price should be paid by you.

However, it is better to make as much down payment as possible. 4 stands for the number of years of financing. Although lenders have a tenure of up to 7 years, it’s better to stick to 4 years.

10 stands for the ideal percentage of your net-take salary that should go toward the car loan EMIs.

Keep An Emergency Fund

An emergency can happen at any time and needs immediate action. Your emergency fund is not meant to meet your planned goals, but it only acts as a safety net. Although there’s no fixed rule on how much emergency cash one would need; ideally, 3-6 months’ household expenses should be one’s emergency corpus.

Must-Have Life Insurance

Ideally, you should have life insurance coverage that is at least 10 times your annual income. The actual requirement may, however, depend on your age, financial goals, financial dependents, accumulated wealth, etc.

The most cost-effective way of buying life insurance is through a pure-term insurance plan.

A pure-term plan is a low-premium, high-cover protection plan where the premium goes entirely towards risk coverage. On surviving the life insurance policy's term, you won't get anything back as there is no savings portion of the premium.

Invest In Equity

It’s often said that one must take the' 100 minus age’ approach to equity investments. For a 30-year-old, 70 percent of his investible surplus should be in equities and the rest should be put in debt. As one age, the allocation towards equities should be reduced. For long-term goals such as retirement, being aggressive in equities will help till at least three years before retiring.

Evaluate Your Loan Amount

Banks and other lenders do not lend an amount where the EMIs exceed 45-50 percent of the borrower's monthly take-home pay. This limit also applies to any existing EMIs on car or personal loans. The monthly EMI on the home loan should be less than 30 percent of the monthly income.

Total EMI obligations should ideally be less than 50 percent of monthly income. Also, ensure that your credit score is 750 plus so you can get the best terms.

Diversify Your Portfolio

Basically, you don’t need more than four to six schemes to diversify your portfolio. If you are investing a small amount, you don’t need to invest in more than one or two schemes. Investing in every mutual fund category will not offer you the best return or diversification.

Have a focused portfolio that aligns with your goal, horizon, and risk profile—this is extremely important if you are investing a small amount.

Do I Need a Financial Advisor?

As you’re sorting through your finances, you might be asking yourself this question: Do I need a financial advisor?

The answer depends on your financial situation. But in most cases, you can benefit from a financial advisor’s knowledge.

Before deciding whether you need a financial advisor, you’ll want to take an extensive look at your financial situation, including your net worth, expenses, and financial goals.

If you choose a financial adviser, always make sure that they abide by fiduciary standards and legal obligations to act in your best interests and disclose any conflicts of interest.

When To Seek a Financial Advisor?

Okay, so you aim to retire at the age of 60. Or you yearn to buy a home. But how are you going to accomplish these and other goals? A trustworthy financial advisor can draw up a roadmap with you that can help you achieve both short-term and long-term financial goals.

Benefits of Having A Financial Advisor

While the benefits of having a financial advisor are many, there are some that stand out. Let’s discuss the main benefits of leveraging the expertise of a financial advisor.

A financial advisor has expertise in the field of finance and is, therefore, perfectly equipped to answer any financial queries you may have.
A financial investor can help you develop a better and more beneficial financial plan that will enable you to meet your financial goals.
SMART stands for Speciﬁc, Measurable, Achievable, Realistic, and Time-bound. A financial goal, for example, needs to be SMART to serve the best returns.
Building the right portfolio, monitoring it from time to time, and reviewing it regularly is not every investor’s cup of tea. That’s where a financial advisor comes in by helping you manage your portfolio.

Final Remarks

Deciding whether you need a financial advisor involves evaluating your financial situation, determining which type of advisor you need, and researching the background of any advisor you’re thinking of hiring.

Before hiring a financial advisor, be sure to ask about what menu of services they offer and what they charge for those services. While you may need to put in some work to find the right financial advisor, the work can be worth it if the advisor gives you solid advice and helps put you in a better financial position.