Succeed in Your Financial Planning
With These 5 Thumb Rules
Here are our 6 thumb rules for financial planning to achieve your financial goals and secure your future.
In this day and age, where even bio-breaks have to be planned to save your time in the office, planning your finances is a no-brainer. But it gets super tricky. While financial planning requires personalized strategies, there are some thumb rules you can turn to that can help you with the whole process. Here are our top thumb rules that will help you plan your finances in the best way possible.
Saving 30%
The rule is simple. You have to save at least 30% of your take-home income every month. This may seem ambitious, but you will find yourself adjusting your expenses if the first thing that you do is put your money in the bank or your investments. To make your life easier, automate the process. Set up automatic transfers to a dedicated savings account or invest directly in mutual funds through Systematic Investment Plans (SIPs). Saving 30% consistently may not seem feasible, strive to maintain this target as much as you can. If unexpected expenses arise, you can compensate by saving more in the following months. The power of compounding is exponential and you can accumulate a fortune with small, consistent savings.
A 12-Month Emergency Fund
Life is a roller-coaster. With every up, there is a subsequent down which can disrupt even the most carefully planned finances. That's where an emergency fund comes in. It is a safety net that provides a financial cushion during unexpected hardships, so you don't have to dip into long-term investments or accumulate debt.
A well-stocked emergency fund covers 12 months of your essential living expenses. This includes rent/mortgage, utilities, groceries, transportation, and any loan repayments.
Buy a House at 2x Your Annual Income
A general rule of thumb of homeownership is that the value of your home should not exceed 2 to 3 times your annual family income. This guideline helps ensure that your housing costs do not strain your financial health. While rising real estate prices may require some flexibility in this rule, carefully consider your long-term affordability when purchasing a home. And lastly, ensure that your monthly mortgage payments are sustainable. Aim for a comfortable debt-to-income ratio, so your housing expenses do not consume a disproportionate share of your income.
Debt< 40% of Income
A key principle is to maintain a healthy debt-to-income ratio. This ratio represents the percentage of your gross monthly income that goes towards debt repayments (including mortgages, car loans, personal loans, and credit card payments). As a rule of thumb, your debt-to-income ratio should not exceed 40%. This ensures you have sufficient disposable income to cover living expenses and save for future goals. If you have multiple loans, consider consolidating them into a single loan with a lower interest rate. Debt consolidation can simplify repayment and reduce your overall interest burden.
Strategic Asset Allocation
Asset allocation involves diversifying your investment portfolio across different asset classes, such as stocks, bonds, and real estate. A simple yet effective guideline is to allocate your portfolio based on your age. A common approach is to invest in equities (stocks) equal to 100 minus your age. For example, a 30-year-old could allocate 70% of their portfolio to equities and 30% to bonds. This approach generally aligns with your risk tolerance and time horizon. As you approach retirement, you shift towards a more conservative allocation with a higher proportion of bonds to reduce risk.
Bottom line
Building a secure financial future may seem like a complex effort, reserved only for the experts. But follow our thumb rules and you might get right on track with your finances and after that, you can make more complex tweaks to your plan..
JJ Tax has more than just thumb rules. Book a free-15 minute call today to have our CAs study your finances and create a personalized financial plan.
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