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

The financial planning process requires due diligence at every step to clearly establish income, expenses and goals based on the ability to take risks. However, there are certain rules of thumb that one can use to get personal finances on track. Once you’ve gotten used to the rules, a proper financial planning exercise can be done 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 earning, be sure to set aside a portion 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 are your expenses’. If you already have your goals listed, figure out how much it takes to reach them and keep saving regularly to reach them. For those who don’t follow this rule, they’ll spend first, then save what’s left for long-term goals. Avoid such practice.

how much to save

Regardless of the salary or business income you earn, set aside a portion to save. You can start with 5 percent and, over time, increase it to a higher percentage, even 25 or 30 percent of income. With age, as goals become more prominent, your savings have to grow. During middle age, you should save a higher percentage and you can try to save the maximum amount. Remember, savings here refers to putting your money into high-yield 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 liquid or short-term funds. This will help get you through financial emergencies like job loss or a medical emergency that requires cash up front.

life coverage

As a general rule of thumb, one should have life coverage of 10 to 15 times 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 loans, etc., must be accounted for additionally.

how much to save for retirement

There is no hard and fast rule, but as a general rule, you can aim for a retirement goal of 20 to 30 times your annual income to retire comfortably. Again, this can vary based on individual requirements, but having a plan and saving for it will eventually help you retire with enough money.

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