Converting Your Goals to a Plan

Now that, we know our cashflows, our goals and options to reach our financial goals with, let’s look at two more things which should be put in place before we start investing.

Below is hierarchy of Investment needs which should be taken care of in the said particular order:

1. Contingency Fund

2. Life insurance, critical illness cover, disability cover and medical insurance

3. Short Term Goals

4. Medium and Long Term Goals

So your contingency fund should be ready first and it is something described by the expense ratio which should be kept ready first.

Expense ratio: 

(Amt in savings account+FDs+cash)/monthly expenses = 6 for salaried people

                                                                                         = 12 for business people and professionals

Expense ratio tells us what amt of contingency fund we should be always ready with us in case of situations like job loss, sudden medical expenses, etc.

 Eg. If you are a salaried individual and your monthly expenses are 50K then you should have 3 lacs in savings account + FDs or liquid funds and cash.

If you are a professional or a business man and your monthly expenses are 50K, should have around 6 lacs in savings account + FDs or liquid funds and cash.

The expenses ratio is 12 for professionals or business men as their income is variable and monthly expenses are constant. Keeping funds in liquid format would help set money aside from good months for months when there is less income.

In case your contingency fund is not ready, put this as your first short term goal, fulfill this first and then move to other goals.

After expense ratio, your medical insurance with critical illness cover and accidental disability cover and your life insurance should be in place, and then you should move to your short term goals and then your long term goals. It no where means your long term goals are less important, what it means is, you should be ready for sudden events like job loss, health issues and life loss first, then short term goals which you have no alternative for or which cannot be push beyond 3 yrs and then make investments for your long term goals.

To understand these concepts in detail, Please watch following video.

50-30-20 Rule of Budgeting

 50/30/20 rule of budgeting

It is such a cliché, we get educated so much, work hard in life so much to have a decent living or to simply put ‘earn well’, but once we start earning, we don’t know what to do with it.

Most of us think, finance is a pretty heavy topic, something we would not understand much about, but to manage our own personal finance, we just need to know some basic things about personal finance, and that is it!

I know, at times when you have a sizable expense, it keeps you wondering, whether you have over spent on the item or was it ok, or when you take a loan, you wonder whether you have over borrowed or no.

With this article, you would know a simple and a really handy rule to track your budget, which we call the 50/30/20 rule.

It would help you know, whether you have borrowed well enough in your capacity to pay back, at the same time save enough for your goals and manage your day to day expenses too.

So, here it goes, as per the representation above, all your expenses like utility bills (grocery bill, electricity bill, phone bill, etc.), expenditure on fuel, entertainment, education, outside food, etc. and rent or Home loan EMI should not cross 50% of your take home salary.

You should allocate 20% of your take home pay i.e. salary after paying taxes, to your short term goals (goals within 3 years) like buying a car, going on vacation, buying any electronic item, putting together an emergency fund for sudden medical expense, for sudden job loss situation, etc.

And you should be able to save and invest 30% of your take home pay for your long term goals (goals beyond 3 years) like kids’ higher education, their marriage, your retirement, etc.

Now, check your own take home salary and check whether fixed expenses and floating expenses are well within above limits or no. And, if no is the answer, you need to put it right and save at least 30% of your take home salary henceforth.

So, with this handy rule, budget well. Stop worrying about money and start loving your budget. After that, I am sure you would save well. Meet you in the next article. Until then happy budgeting!