“Thumb Rule of Budgeting for personal Finance”
Earlier we have discussed about the needs of Personal Finance in our daily lives.The necessity of having a sound personal finance plan in line with our financial goals.I am sharing the (Links for Needs of Financial Planning) links below.
Similarly, today we are going to discuss about the most obvious and relevant topic of personal finance that is Budgeting.Every action plan is based on a proper budgeting plan and personal finance is also no different.A proper budget helps us in deciding and setting up our financial goals in realistic manner.I have already said that one’s financial goals should always remain in line with his or her earnings.Therefore, a sound budgeting plan always comes handy there.We must not forget that while making our budgets we should differentiate between our needs and greeds.
Thumb Rule of 50/30/20 :
Very often we get confused about what should be the exact expenses ratio be it household exp,be it loan EMIs,other repayments or savings in comparison with our earnings which is take home pay here.So that we can have a clear idea whether we are over spending or over borrowing.
Thumb Rule of 50:(From expenses point of view Maximum 50% of net take home pay after Tax)
*Our mandatory or unavoidable expenses should not exceed 50% of our take home pay after tax.
- All household expenses—-Such as Utilities,food,entertainment ,education,fuel cost,payment for health policies and etc;
- Home loan EMIs/House Rent;
Thumb Rule of 30:(From savings point of view Minimum 30% of net take home pay after Tax)
**We must have inculcate the habit of savings for investments towards our long term goals.
- Such as children’s higher education,foreign tour planning with family,child’s marriage,corpus for retirement ,payment of Term life insurance premiums,and etc.Those who have just started their earning career and have not bought any house yet and planning for it may consider this rule as 50% instead of 30%;
- To meet the long term goals i.e. from 5 to 7 years and more with ease one must invest in equities at the outset.Depending upon one’s risk profile he must invest this amount in different Mutual funds of different categories such as Long term,Mid & Small cap and Small cap funds.Also with the help of financial advisors one can invest in stocks of their own risk profile.
***Thumb Rule of 20:(To meet short term i.e. from 2 to 3 years needs)
Usually, this rule may be followed for meeting up short term needs outright.
- Such as—- local vacations,purchase of electrical appliances of needs,setting up emergency funds for loss of job usually for 4 to 6 months expenses,downpayment for buying a car, emergency medical needs and etc.
- To meet these sort of goals one may consider Bank FDs,Liquid Mutual Funds,Balanced Equity Mutual Funds,Debt Mutual Funds and lastly Savings Accounts.
I would conclude here by quoting one great saying of American Finance Guru Warren Buffet. He said that ” If we purchase anything that we don’t need today,there may come a day when we have to sell the things we need today”.