There are certain thumb rules for better financial planning that one may use to bring the personal finances on track and plan their financial freedom in the next 5 to 10 years. 

Thumb rules for a better financial planning process need due diligence at every step to absolute layout the income, expenses and goals based on one’s risk-taking capacity. However, there are many thumb rules that one may use to bring the personal finances on track. Once familiarised with the rules, proper financial planning exercises can be conducted to bring savings in line with the goals or personal objectives. 

Here are five important thumb rules for better financial planning decisions:

Income minus savings equal to expenses

From the day you begin earning, make sure you placed aside a portion of your income as savings. Now, plan your discretionary and non-discretionary expenditures from the balance. No matter how little you save, begin early and make saving a good habit.

The thumb rules for better financial planning is ‘Income minus savings is your expense’. If you already have your goals or objectives listed out, find out how much is needed to achieve these objectives and keep saving regularly towards it. Those who do not follow this thumb rule, will spend first and then save whatever is left for the long term goals. Avoid such a practice from now onwards.

How much to save

Irrespective of the salary or business income you earn per month, set aside a portion towards goal-oriented savings. You can start with 5 0r 10 per cent and over time increase it to a higher percentage of even 25 or 30 per cent of income. With age as goals become more noticeable, your savings have to increase. During middle age, you require to save a higher percentage and can try to save the maximum amount. Remember, savings here guide to putting your money into high yielding financial products and not merely keeping it in a bank account.

Emergency fund

Even before you start to invest in any type of funds, make sure you have sufficient emergency funds. As a thumb rules for better financial planning, keep an amount equal to at least six months of expense in a mix of savings accounts and short term or liquid funds. This will support to tide over financial emergencies such as job loss or a medical emergency needing upfront cash.

Also Read: Financial Freedom Before 30- How to achieve it?

Life cover

As a thumb rules for better financial planning, one should have life coverage of 12-15 times one’s take-home annual income. This will support survivors to keep their standard of living in the absence of bread earners in the family. Other disadvantages such as home loans etc require to be accounted for additionally.

How much to save for retirement

There’s no fixed rule but as thumb rules for better financial planning, one may aspire for a retirement target corpus of 25-30 times one’s annual income to retire comfortably. Also, this may vary as per one’s condition but having a plan and saving towards it will ultimately help retire with enough money.