Given our busy lives, rules of thumb are a great tool to save time and yet make right decisions. So let me share with you a list of ten key short-cuts pertinent to your personal finances. These are the concepts that can easily be learnt and applied in our day-to-day money matters.
1. Depending on your job stability and financial position, you should keep aside an amount equivalent to around 3 to 6 months’ of your monthly expenses as an Emergency Corpus.
2. If you have a home-loan, the total of all your Equated Monthly Installments put together should not exceed 45-50% of your monthly take home pay. If you have education / vehicle loan, your outflow on loan installments should not go beyond 25-30%. But if you are servicing only the personal loans and credit card outstanding, this limit is strictly 10-15%.
3. At the bare minimum, 10-15% of your monthly income should be invested for crucial long-term requirements such as children’s education and your retirement. The actual savings would, of course, depend on the specifics of your case.
4. Your investment in equity should be equal to 100 minus your age; with the balance amount in debt products.
5. Re-balance your equity-debt portfolio when there is a 5% deviation from the ideal ratio that suits your financial profile.
6. Your life insurance cover should be around 6 to 10 times your annual income. (And as has been often advised, Term Plan is the cheapest and simplest way to do so.)
7. Your vehicle loan tenure should not be more than 3-5 years.
8. You may need a retirement corpus of at least around 100 times your current annual expenses to maintain the same standard of living.
9. First insure, then invest and finally what remains should be spent.
10. Before investing use the Rule of 72 to quickly compute in how many years your money would double (=72/annual rate of return). Alternatively, you can also estimate in how many years would your liability double if you don’t pay your monthly loan installments / credit card bills.
Caution: As per the definition, a rule of thumb is a principle with broad application but is not strictly accurate or reliable for every situation. Therefore, be careful about how you apply these rules of thumb. They may sometimes yield a wrong answer. For example, just because your age is 30, doesn’t necessarily mean that you can invest 70% money in equity. Maybe you have a requirement for a house purchase in next 1-2 years. In that case taking such a high exposure to equity would surely be a bad idea.