What is the first rule of finance?
Upon entering the job market young professionals have one common goal. The said goal is to accumulate enough wealth for the future. People have the said goal because the said wealth might be useful for them after retirement. The long-term wealth accumulated might be useful for taking care of day-to-day expenditures after retirement. But, while people may know what they want, i.e., accumulate long-term wealth, they don’t know what they should do to achieve what they want. One of the things you can do is formulate a financial plan. Sticking to the said plan might help you in reaching your financial goals. The process of formulating a financial plan can be defined as financial planning.
The process of financial planning requires due diligence on your part. You need to clearly lay down things like income, expenditures, and goals. You need to make note of these things after assessing your risk-taking capacity. But there are certain thumb rules that you need to follow to bring your personal finances on track. Once you are accustomed to the rules, you can carry out proper financial planning exercises to bring your savings in line with the goals. Here are some of the important thumb rules you need to follow so that you can make better financial planning decisions:
- Start saving as soon as you start earning:
The ideal situation will be that you keep aside a part of your income as savings from the day you start earning. You need to plan your discretionary and non-discretionary expenditures from the balance. Regardless of how little your savings are, it is prudent to begin early and inculcate the habit of saving. In case you already have listed-out your goals, you need to determine how much you need to save for achieving your financial planning. Then, keep saving regularly towards achieving your goals. Those who do not follow this rule, will splurge first and then save whatever is left for long-term goals. You need to avoid this practice.
- Build an emergency fund:
Before you start your investment journey, please make sure that you have an adequate balance on the emergency funds. As a thumb rule, you need to keep an amount that’s equal to at least six months of expenditure in a mix of savings accounts and short-term or liquid funds. An emergency fund or mutual fund might help you to tide over financial emergencies such as job loss or a medical emergency that requires upfront cash.
- Invest in schemes that offer higher returns:
Regardless of the salary you earn, you should keep aside a portion towards savings. You can start with a very low investment amount and over time, increase it as your financial situation improves. With age as your duration for achieving goals come closer, your savings also must increase. During middle age, you need to save a higher. Please remember that savings here refer to investing your money into high-yielding financial schemes and not merely depositing it in a bank account.
- Make sure to have life cover:
There is another thumb rule that you need to follow. It is important that you should have life coverage that’s 10-15 times higher than your take-home annual income. A life cover will help your family to maintain their standard of living in your absence. Also, liabilities such as a home loan also need to be accounted for additionally.
- Save for retirement:
As stated earlier, a common goal every professional has is accumulating enough wealth for the purpose of retirement. While working, you need to have a plan and start saving a part of your income so that you can retire with enough money.
Other than the five above, there are several other rules that you need to follow so that you can retire with enough money at your disposal. In case you have some doubts about retirement planning, please contact a financial expert.