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10 basic rules of financial planning December 23 2020Financial planning, 10 basic rules of financial pl

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Financial planning and money management is essential as it provides a blueprint of how things can be done and administrated smoothly without any sudden shocks from the monetary point of view. Money is everything, one can’t sustain for a long time without money. Financial planning gives an advantage to tackle all the transactions and different kinds of money exchanges whether it be in the form of household expenses, debts, investments, assets or savings etc.

Let’s discuss the 10 most basic rules of financial planning.

1 Equity Investment ratio

The first fundamental rule of money is based on the equity investment ratio. Equity investment generally portrays risk bearing due to which the age to investment ration plays a prominent role for the investor to keep his investment safe and less risky. The basic rule for deciding the equity to investment ratio in the investment environment is to subtract your current age from 100. The output of this subtraction is the percentage of your equity investment ratio.

For example-If your age is 25, you can allocate 75% for your equity investment and 25 percent for debt.

2 Emergency funds

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Another simple rule of money is to focus on emergency fund. One should hold a minimum income of 3 months as an emergency fund. This emergency fund should be held at an easily accessible position. Retired individual should maintain at least 1 year of income as an emergency fund in order to counter any kind of uncertainties. Emergency funds should not be overloaded as it could create a shortage of capital for your daily running life.

3 The EMI rule

If you’re purchasing something on EMI, the total EMI should not exceed 35% of your income. And in the case of a Home Loan, the EMI value should not exceed 25% of your income. EMI can be a flexible payment option but if you exceed your limit, it can ruin your financial plans.

4 Keeping debt under control

Ideally, you don''t have consumer debt, but again, that''s not always realistic. You could have student loan debt, credit cards, car payments, or some other form of debt you''re trying to handle. About how much debt is too much?, most financial planning experts agree that your overall monthly debt payments should not exceed 36% of your monthly gross income.

Over time if you can reduce the number of debts, you’ll hold a pretty good position.

It’ll allow more amount of money from your monthly income to go towards principal amount which will eventually result in to some handful savings.

 5 Aim to save atleast 10% of your income

One of the most widely known and used method to adopt savings is to save atleast 10% of your income. These savings can act as a cushioning for any unexpected expenses.

6 How much money you can spend while buying a house?

There’s no rigid rule for deciding the amount for buying a house although you should keep in mind that the value of the house shall not exceed 4 times your family annual income.

For example- if your family annual income is ?10lac, you can buy a house for up to ?40lac.

7 Insurance

Insurance policy is something which is pretty needed especially at this moment of time, in the world of uncertainties where any new disease can pop out and make considerable impact on the whole world. You can keep 10% of your yearly income to invest in insurance policies to get yourself covered.

8 Rate of return

The rule of 72 is another essential rule of wealth. If your annual return is 12%, your money will be doubled in six years. If the return is 8 percent it’ll take 9 years and if the return is 14 percent it’ll take just 5 years for the money to turn into double. So choose your policy smartly after analysing the return percentage.

9 Whether to invest in equity or bank nifty?

Many investors invest either only in equity or only in bank nifty. Instead, the investors should have a hybrid or diversified portfolio with a mixture of both equity and bank nifty deposit which will creat a balance in the portfolio.

10 Retirement planning

10% of your income can be reserved for your retirement plans. Start as soon as possible and invest as much as you can for your retirement plan.

Takeaway.

Evaluating your expenses is the utmost important aspect to keep your financial planning alive. You can list down all your expenses and allocate all of them to their respective causes. The surplus amount after churning all the expenses can be used either for savings, investing or can be included in your retirement planning. Plan your money wisely. 

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