Simple Thumb Rules for Financial Decisions

1) Expenses = Income Minus Savings

Though this rule looks very simple having an arithmetic equation, it has dramatic effects. Normally, we assume that whatever income is left after meeting our expenses should l be put in Savings . For example If our monthly income is Rs.50,000 and monthly expenses are Rs.35,000/- we say that I can save Rs.15,000/- .However this rule asks us to think other way round . It insists on deducting your pre-decided savings amount from your income and managing expenses in the balance amount. In the above example , if my monthly income is Rs.50,000/- and my savings are Rs.20,000/- I have to manage my expenses in Rs.30,000 only ( Rs50,000 minus Rs.20,000) . This rule helps to inculcate the habit of regular savings

2) Retirement Fund = 20 X yearly income

This rule explains that our total retirement fund should be at least 20 times of our yearly income .   For example a salaried person having annual salary of Rs 5 Lacs at the age of 60 should have a corpus of Rs1 Crore ( 20 X 5 Lacs ) as a retirement Fund . The logic behind this rule is that we can sustain financially atleast for 20 years after  retirement . Such  corpus should be invested in Bank Deposit or other investment option so that the interest earned on the same will help to reduce the effects of inflation.

3) EMI < 35 % of monthly income

Installment amount of housing loan should be less than 35 % of monthly income of the family. For example , if family monthly income is Rs. 1,00,000 , then the EMI ( monthly loan installment ) amount should not be more than Rs.35,000/- . This rule keeps us away from taking unaffordable housing loans and to save for future . If we ignore this rule , we may face problems in  loan repayment in case of any financial crunch .

4)Life Insurance Cover > 15 times of annual income

We often take life insurance policy but we are not aware about the exact amount needed as an insurance cover . Though it is difficult to calculate precisely , this thumb rule tales that your insurance cover should be atleast 15 times of annual income. Thus a person having annual income of Rs.10 Lacs should have insurance cover of atleast  Rs 1 Crore 50 Lacs. The logic behind this rule is that ,in case of any unfortunate incidence , the family can survive for next 15 years with the help of sum assured . This is very important point specifically for single earner family (family where only one person is earning )

5)100 minus Age

This rule points out that 100 minus our age should be the percentage allocation of our assets in Stock Market and Mutual Funds . For example a  35 years old young person should invest 65% ( 100 minus 35) of his total funds in stock market and mutual funds . When he will be 60 years old , he should reduce his stock market and mutual funds investment to 40% ( 100 minus 60) . This rule insists on reducing the investment risk as we grow by age.

Dr. Virendra Tatake

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