Five Personal Finance Thumb Rules To Follow To Sort Your Money Life – Outlook India
Following certain thumb rules can sort out your finances broadly. Thumb rules may not always give you an accurate picture but can steer you in the right direction as they are usually time-tested processes. They are something that are easily learnt, remembered, and applied.
“Thumb rules help in streamlining our finances. Basically, when we form a rule and follow a time-tested process, our probability to reach financial freedom increases,” says Anant Ladha, founder, Invest Aaj For Kal, a financial planning firm.
Here are five popular personal finance thumb rules that you can follow to sort out your money life. However, ensure they suit your personal circumstances instead of following them blindly.
1. Maintain an emergency fund equivalent to 6 months of your salary: You know how important it is to create an emergency fund. It always comes to the rescue when you are in crisis. This should include regular expenses, EMIs, and your insurance premiums.
While six months is the general thumb rule, it differs from case to case. For instance, those with secure jobs can look at three months of emergency money, while the self-employed or those into freelance assignments, who face higher uncertainty, can keep aside expenses that can last up to a year.
2. Take a term insurance 10 times of your annual income: The purpose of a life insurance is to replace the income of the insured in case of his or her unfortunate demise. While there are ways to calculate your insurance requirements, the thumb rule is that you should buy life insurance that is equal to at least 10 times your annual income.
It is recommended that you buy a pure term plan as these plans offer a higher coverage at a lower premium.
3. The rule of 100: This thumb rule suggests that the percentage of equity in your portfolio should be 100 minus your age. So, when you are 30, the equity portion of your portfolio should be 70 per cent. When you are 40, it should be 60 per cent and when you are 50, it should be 50 per cent, and so on. This thumb rule is based on the fact that equity investments deliver good returns over a longer time period as market volatilities even out. So at the start of your career, you should have a higher proportion in equity and reduce your equity exposure as you near retirement.
4. The 35 per cent rule: Some loans like home loans and educational loans are good loans. However, other debt like credit card dues may put a strain on your …….