6 Basic Rules of Financial Planning

Financial planning and money management are essential because they provide a blueprint for how things should operate and be administered in order to avoid any unforeseen financial shocks. One cannot thrive for lengthy periods of time without money. Whether it’s household expense, debts, investments, assets, or savings, financial planning gives you an advantage in dealing with all form of transactions and money exchanges.

The six most basic financial planning guidelines are listed below.

1 Equity Investment Ratio

The first fundamental rule of money is the equity investment ratio. The age to investment ration plays a major role in keeping an investor’s investment safe and risk-free. The basic procedure for estimating the equity to investment ratio in an investment environment is to subtract your current age from 100. The result of this subtraction is the proportion of your equity investment ratio.

If you’re 35 years old, you can put 65 percent of your money in stocks and 35 percent in debt.

2 Reserve funds in case of emergency

Another simple financial suggestion is to set aside money for an emergency fund. One should have at least three months’ worth of salary in an emergency fund. The emergency funds should be maintained in a place where they are easily accessible. Retirees should set aside at least one year’s worth of income to be prepared for any situation. However, overspending on emergency funds could lead to a cash flow deficiency in your day-to-day operations.

3 The EMI rule

If you’re buying something on EMI, the EMI cost shouldn’t be more than 35% of your income. If you take it for a Home Loan, the EMI should not exceed 25% of your monthly income. EMIs are a convenient way to pay, but they might sabotage your financial goals if you go over your credit limit.

4 Set a goal of saving at least 10% of your income.

One of the most frequently acknowledged and practiced strategies of saving is putting aside at least 10% of your income. This money can be used to pay for any unexpected expenses.

5 Investment return

Another important wealth criterion is the rule of 72. If you earn a 12% yearly return for six years, your money will have doubled. If the rate of return is 8%, it will take 9 years to double the money; but, if the rate is 14%, it will only take 5 years. So, after considering the return percent make an informed investment decision.

6 Preparations for retirement

You can set aside 10% of your income for your retirement plans. Start saving as soon as possible for your post-retirement years.

Takeaway.

You must review your spending in order to keep your financial planning on track. Make a note of all your expenses and categorize them according to their proper reasons. You’ll have a surplus after deducting all of your expenses, which you can put toward savings, investments, or retirement planning. These financial planning guidelines will help you make sound financial choices.

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