5 personal finance rules of thumb to help you make better financial planning decisions

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The financial planning process requires due diligence at every step to clearly articulate income, expenses, and goals based on one’s ability to take risks. However, there are some rules of thumb one can use to get personal finance on the right track. Once accustomed to the rules, a proper financial planning exercise can be carried out to align savings with goals.

Here are five important rules of thumb to help you make better financial planning decisions.

Income minus savings equals expenses

From the day you start making money, be sure to set aside some of your income as savings. Now plan your discretionary and non-discretionary expenses from the balance. No matter how little you save, start early and make saving a habit.

The rule is “Income minus savings is your expense”. If you’ve already set your goals, find out how much you need to achieve them and keep saving regularly to achieve them. For those who don’t follow this rule, they will spend first, then save whatever is left for long-term goals. Avoid such a practice.

How much to save

Whatever salary or business income you earn, set aside some for savings. You can start with 5% and over time increase it to a higher percentage of 25 or 30% of income. As you age, as goals become more important, your savings should increase. In middle age, you have to save a higher percentage and you can try to save the maximum amount. Remember that savings here refers to putting your money into high yielding financial products and not just keeping it in a bank account.

Emergency fund

Before you even start investing, make sure you have adequate emergency funds. As a general rule, keep an amount equal to at least six months of expenses in a combination of savings account and short-term or liquid funds. This will help you weather financial emergencies such as job loss or a medical emergency requiring a cash advance.

Life cover

Typically, a person should have life coverage of 10 to 15 times their net annual income. This will help survivors maintain their standard of living in the absence of breadwinners in the family. Other liabilities such as mortgage, etc. should be counted additionally.

How much to save for retirement

There is no set rule, but as a general rule, one can aim for a retirement target corpus of 20 to 30 times one’s annual income to retire comfortably. Again, this may vary depending on need, but having a plan and saving for it will eventually help to retire with enough money.

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