Rules of thumb may come in handy for those who are just beginning their financial planning. Youngsters who have just started their career may get some direction on where and how to make a beginning. For those who are in the middle of their career and don’t yet have a proper plan in place, thumb rules can also be helpful. But remember, they only provide a general direction and may not necessarily give you the exact picture.
The very first rule of personal finance says: ‘Pay yourself first’. It simply means that out of your monthly income, a certain percentage has to be saved before it is spent. ‘Income minus savings equal to expenses’ should be the rule and not vice-versa.
For this to happen properly, identify your goals, estimate the inflation-adjusted requirement and then find out how much you need to save for them. Now make sure that each month funds move out from your salary towards your goals, and manage your household expenses with what is left. You, in a way, are first paying for yourself, i.e., your goals.
Confused about how much to save and spend each month? Here’s how to get started. It’s the 50-20-30 Rule, i.e., 50 per cent of your income should go towards living expenses, i.e., household expenses, including groceries; 20 per cent towards savings for your short, medium, long-term goals; and 30 per cent towards spending, including outing, food and travel. The idea is to create outflow buckets for better control. Individuals may tweak the percentage according to their age, circumstances, etc.
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