The basic rule of financial planning will come in handy for those investors who are beginners and adhere strictly to these rules. Individuals who have just finished their education and have landed in a job may be little confused to the world of investment. Most of the beginners do face these questions like how to invest, where to invest, how much to invest and so on.
It's just not beginners even some individuals who are in the middle of their career paths also may not have sketched out a proper finance plan. Such investors can follow the basic rules of financial planning to achieve financial goals.
One thing the investor has to keep in mind is these rules can just provide a direction for investment but not the exact picture.
Let's explore some of the rules of financial planning.
Here in the 50/20/30 rule, the investor should spend 50 per cent of his/her income to cover all the expenses be it house rent, utilities, household, groceries and so on.
The 20 per cent of the income should straightly go towards savings account without any compromise. As saving for the future is a must to be financially secure. An investor can opt for any type of savings be it for a short term, medium-term or long-term investment.
The remaining 30 per cent of the income of the investor can be spent on travel, food and so on. Here the idea of spreading the monthly income into three portions is done to create better control of the outflow of money.
Please Note: As one grows older, it is better to save more and the portion of funds which goes towards savings should be increased gradually.
How Much of Funds Should be Saved?
This is the most common yet a very important question which most of the people who have just started their career will have in their mind. Generally, the income of an individual will increase drastically over the period.
For beginners, it is better to set aside at least 10 per cent of their earnings after taxable income as savings. As the number of years rolls out, increase the savings amount and try to set aside at least 15 per cent of the income.
As you grow older, so your financial expenses and liabilities grow hence it is necessary to save enough to achieve the desired goals.
If an investor is middle-aged, then raise the savings bar level to 35 per cent of the income after paying off income tax. Because the financial expenses during this phase of life will shoot up.
Pay for Self
The first rule of personal finance states, first pay for yourself. One should set aside some funds from their income as savings before spending the earned money. It is always Income - Savings = Expenses and not the other way round.
First chalk out a financial goal after taking into consideration many factors like income, expenses, inflation rates and other things and figure out how much you will have to save for them.
In the next step, ensure that every month sufficient funds from your salary will be directed towards your financial goals. Try to manage your monthly household expenses with the remaining amount left with you, in this way an investor will be able to pay for self first.
It is mandatory to set aside funds meant for emergency purpose, as this comes in handy to meet the unexpected events which come knocking your door without alerting. If in case, if a family member faces any medical issue or there is a loss of job and so on, the emergency corpus built by the investor will come in handy.
The earlier one starts to build the emergency corpus, the better it will be to meet the unforeseen circumstances. These funds provide cushion to the individual as well as his/her family to combat the situation.
There is no hard and fast rule as to how much an emergency fund should be built. But it is ideal, to set aside three to six months of monthly income as an emergency corpus, to tide over the uncertain situation.
The retirement funds are also known as pension funds. It offers a regular source of income to the individual's post-retirement. Here, the investor will receive annuity on their investment until their demise.
It is not easy to arrive at the exact figure as to how much to save for building a retirement corpus. But it is better to shore up anywhere between 20 - 30 times of your annual income towards building the retirement corpus, after considering inflation rate.
Planning to save early for retirement is the key to success as it will give an investor ample time to build his/her retirement funds. This financial rule will work for those whose retirement is many years away than the ones who are set to retire soon.