Six Money Ratios You Should Have Handy
Finding a balance between not doing enough and doing too much is hard for the money, as it is with relationships. Do too little and a guilt floods you whenever you have a moment. Overdo it and you sacrifice your today for limited future gains and life becomes a matter of not living. I’ll leave it to you to sort out the relationship, but let’s at least put the money issue in perspective. While every situation is different and every family needs their own financial plan, it’s good to have at least a few ground rules to know if you’re at least going in the right direction. Keep in mind that these ratios are just very rough rules that tell you a direction rather than a detailed Google map. To do this, find a planner, pay their fees and have your plan made to measure.
Ratio One answers the question: how much should I spend and save? While the answer differs across ages and stages, it’s pretty accurate to say that if you spend about half of your net income on living expenses, comfort, and luxury, you’re doing fine. Usually the pressure to spend is higher among younger people due to limited income and many expense heads, and in the 1950s consumer discretionary can decide whether you spend half or more of your income at home. or only a fifth of your money on hand. each month. On average, spending half your price at home is fine.
Ratio Two answers the question: how much should I save each month? The propensity to save varies over the years and is particularly low when you are between the ages of 20 and 30. Growing families and rising aspirations make it difficult to save. If you save 20% of your net income, you are doing well. Remember that you are already making 24% of your base (usually a lower number than net money) through your EPF. Anything you can do on top of that in your 20s is good. In your 30s, you should hit the 20% savings goal. This can increase in your 40s and 50s if necessary. On average, saving 20% of your income at home is a good thing, whether you are self-employed or in the organized sector.
Ratio three answers the question: how much should I spend on my NDEs? Two incomes make dealing with debt easier, but things are so uncertain that it’s best to stay safe and keep your total IEMs below 30% of your net income. Home loan, car loan, gadget loan, it shouldn’t all be more than 30% of your monthly income.
Ratio Quatre answers the question: how much should I have in my emergency fund? Between six months and two years of your monthly expenses. Depending on your age, stage, and leverage level, choose within this range. Typically, a younger single person will go for six months and a person with many dependents and a single income will go for a year’s life’s money. People in their 50s should already have plenty of assets for retirement, from there, keep two years of spending in near cash form. Between six months and two years is what you need.
Ratio 5 answers the question: how much life insurance should I buy? At least 10 times your annual income. But that number changes as you advance in your career and continue to earn more. It’s a good idea to adopt a 10-fold income policy in your mid-thirties when incomes are not as low as they are in your twenties. If you are taking out a home loan, do not take a degressive policy to cover the loan. Take another term to cover the loan and keep it as a second policy to increase overall coverage. Keep the policy even after the loan ends. By your 50s, you should be more than halfway away from your kitty retirement goal, so the need for very large life coverage decreases. You can continue with your existing policies, but trying to cover your much larger income may not be helpful. Either way, when you have your retirement money in place, there is no need for life coverage. Ten times your annual income is the norm.
Ratio Six answers the question: how much should I have for my retirement? This is perhaps the most difficult question to answer. You literally need a degree in finance, economics, politics, and a crystal ball to properly assess what you’ll ultimately need at 60. My own calculations show that you need 18 to 35 times your annual spending at age 60 for a retirement fund — 18 times if you plan to leave no money for the kids and eat out of the capital, 35 times if you plan on leaving money for the kids. plan to leave all the money to the children. A reasonable assumption is 26 times your annual expenses at age 60. If you are going to spend ??20 lakh at 60, then you need around ??5.2 crores. I overestimated your expenses and underestimated your returns. Another way to do this is to aim for three times your income at age 40, six times at age 50 and at age 60 have eight times your income. Keep in mind that expenses will be about 25-30% of income by the time you are at the peak of your retirement career. The figures for the expense ratio and the revenue ratio will add up. About 26 times your annual expenses at age 60.
Monika Halan is a consulting writer at Mint and writes on household finance, policy and regulation.
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