Every year we take new resolutions. How many of you have taken money resolutions? Here are the biggest money tips for 2022 that will help you become financial independent and free.
“Manage Risk better, return will follow”
1. Income – Savings = Expenses
As Warren Buffet said, ‘Do not save what is left after spending, but spend what is left after saving’.
This is the basic rule of personal finance. Determine the amount you’d like to save first and set aside a part of your income as savings, before you plan your expenses, and not the other way around.
2. How much to save?
The savings you need depend on your life goals. The percentage of savings should ideally correlate with your age and career phase. At an early stage in your career, save at least 10% of your income.
As you advance in your career and your income increases, raise savings to 15% and aim to save 35% around the age of 40.
3. The 50-20-30 rule
While saving 10% of income should be your minimum target, try to follow the 50-20-30 rule.
As per this rule, earmark 50% of your post-tax income towards living expenses, 20% for savings and 30% for other leisure activities like vacations, eating out etc. This will help you adequately distribute your income towards all needs
4. How much to invest in equity and debt?
High paying equity investments are riskier compared to debt. To effectively allocate your investments between the two, follow the 100 – age rule. That is, the percentage of equity in your portfolio should be 100 – your age.
So, if you are 30 years old now, invest 70% in equity and the remaining in debt. You become more risk averse as you grow older, therefore the percentage of equity in your portfolio would reduce as start investing a higher percentage in less volatile debt instruments.
5. Contingency Fund
Maintain an emergency fund to meet unexpected expenses. The thumb rule is to have a contingency fund worth nine months’ income. But, this can take some time to build. So, start by setting aside enough money to sustain your needs for three months.
6. Life Insurance
This rule says your life cover should be ten times your annual income. If you want adequate cover at a reasonable price, consider a pure term insurance.
While it doesn’t provide any proceeds at maturity, it is the most affordable way of protecting yourself against risks. You can choose a policy for a desired term and pay regular premiums to enjoy its benefits.
7. How much to save for retirement?
Most experts believe a retirement corpus of 30 times ur annual income is reasonable, if u wish to retire comfortably. Optimal savings vary depending on ur income but it should be a significant amount to take care of your post-retirement needs.
To build a sizeable retirement fund, have a target in mind and after factoring in inflation, work backwards to estimate how much you should start saving today.
8. Buying a house
To own your dream home, try to pay 20% as down payment. Also, ensure the total EMIs you pay do not exceed 50% and home loan EMIs stay under 30% of your income.
In the current home loan interest rate scenario, you should be able to comfortably afford a house with a value of approximately 4.5 to 5 times your annual income.
9. Buying a car
When you plan to buy a car, first decide a budget and take a loan. The thumb rule to follow here is “20/4/10”. This means, you should make a down payment of 20%, repay the loan in 4 years with a maximum EMI of 10% of your monthly income.
While diversification alleviates investment risk, don’t invest in more than 10 funds at a time. The marginal advantage gained from diversification is lost in the hassle of managing and keeping a track of your portfolio.
11. Net Worth
Your net worth includes your cash, investments, home equity, jewellery, furniture and other assets like artwork. To accumulate a good amount of wealth, aim for a minimum net worth of the product of your age and one-tenth of your annual pre-tax income.
Remember that there is no direct solution to your personal finance situation. Habits listed here are to be used as starting points – start here and tweak them based on your risk appetite, inherited wealth and personal goals.
Written by CA. Clifford D’Souza
CA Clifford is a passionate toastmaster and an intelligent Chartered Accountant. He is also a short term and longterm investor, do research on both technical and fundamentals of the scripts, and also guide many in the group for the stocks. Both for the short term and longterm stocks.