If you’re not sure where to start while making a budget for yourself, we’re here to tell you of some of the personal finance thumb rules that can come in handy.
Personal finance is extremely crucial when it comes to managing your money and investments. If you’ve just started enjoying a steady income, it might be quite difficult for you to set aside a huge chunk of your paycheck every month.
We suggest that you start small. Begin by saving whatever you’re left with at the end of each month. With time you can graduate to saving at least 10% of your monthly earnings. It’s quite simple really. The earlier you start, the more time your finances get to compound.
If you’re crawling from one paycheck to the next, these thumb-rules are for you. Think of these as building blocks or as roadmaps to help you organise your money for different goals.
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The 50-20-30 Budgeting rule
This is one of the most popular personal finance guidelines. It suggests that ideally about 50% of your paycheck should be reserved for needs, the next 20% for Savings and the remaining 30% for wants.
In order to implement this, you have to have a clear idea of your spending. Divide your spends into three categories.
- Category 1 comprises defined expenses that are fixed, necessary, and stay the same each month. For instance, this will include your monthly rent, loan EMIs, Insurance premiums.
Pro Tip: Want to manage your Loan EMIs better? Try our Loan EMI Calculator!
- Category 2 consists of variable expenses that are flexible but necessary. These expenses vary each month such as your utilities, commuting expenses, and weekly groceries. Expenses falling under this category can be reduced by making different lifestyle choices. Think of switching to walking or cycling to work instead of booking a cab.
- Category 3 includes your optional and personal expenses such as dining in a restaurant or clubbing with your friends. These are not essential expenses and are often discretionary. When it comes to these, the choice is yours.
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After you’re done categorizing your expenses, here’s what you should do. Try allocating a specific portion of your salary for each of these categories. Here’s where the 50-20-30 rule comes in.
– Reserve 50% of your income for living expenses and absolute essentials. This will cover your fixed, variable, and discretionary expenses such as your rent, outstanding credit payments, bills for utilities and groceries, and transportation costs.
– 20% of your income should be directed at your financial goals. This includes your retirement corpus, investments, and emergency fund.
–30% of your income must be reserved for flexible spends including non-essential expenses. These include everything you wish to purchase but don’t necessarily need.
Simple, right? Initially it might get a bit difficult to segregate your paycheck and break it down in terms of spending and saving categories. However, we promise it’ll get simpler with a fair bit of determination!
Additional Reading: 4 Easy And Workable Tips For Sound Personal Finance
The 20-4-10 Car Loan rule
Are you looking forward to funding the purchase of your dream car through a Car Loan? However, remember to apply for a loan amount as per your paying ability. Applying for an amount higher than what you can pay can land you in soup, especially if other financial commitments come in the way.
- 20 refers to the percentage amount you need to make as a down-payment towards the Car Loan. This ensures that you pay a considerable amount right at the beginning, thereby decreasing the total interest you end up paying.
- The rule states that the tenure of the Car Loan should not exceed 4 years. Most lenders out allow you a tenure of 7 years but that’s more favourable for your lender than you. How, you wonder? The longer the loan tenure, the more you pay towards interest.
- 10 is the percentage of your monthly salary that should go towards the monthly instalment of the car. The lower the percentage, the better. The idea is to stay out of a debt trap. All related expenses including your principal amount, interest, and insurance of your car should be below 10% of your gross income.
This one will help you keep your finances under control when you’re buying a new car.
Additional Reading: Minimalism: The Key To Sprucing Up Your Personal Finances
Growth of Investments
Have you been wondering how many years it will take for you to double/triple or quadruple your money?
- Rule of 72: The number of years your investment will take to double can be calculated by the formula 72/expected return.
- Rule of 114: The number of years your invested sum will triple can be derived by calculating 114/expected return.
- Rule of 144: The number of years your investments will quadruple in is calculated by 144/expected return.
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Now that you’ve got tips to handle your finances like a pro, remember that these rules are not set in stone. Most of them are just practical ways of sorting your money. As you go applying these to your daily finances, keep in mind to devise strategies that are best suited for your financial goals!