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!

Children Education Planning

Children Education Plans:

Let us discuss about Child Education Plan (Graduation) in this post.

Current Cost of Desired Education (Engineering) : 10,00,000/- 
Current Age of Child : 5 Years
Age of Child when Corpus is Required: 18 Years
Expected Rate of Returns: 12% p.a.
Inflation : 8% p.a.


With some planning, you can provide your child the best education – the very best. Here’s the calculation that lets you understand what’s in store financially, to fund your child’s Graduation (Engineering) that currently costs Rs.10,00,000/-

If the rate of inflation is 8 % p.a. the cost of your child’s education when they turn 18 in 13 years would be Rs. 27,19,624/-. 

You will need to invest a lump sum of Rs. 6,23,266/- or make a monthly investment of       Rs. 7,307/- at an annual return of 12 %, to successfully meet your child’s education cost.

Suggested Portfolio:
Mix of Large Cap, Midcap and Multicap Funds.

Retirement Planning

Let us discuss a Retirement Planning case in this post.

Current Age: 35 Years

Retirement Age: 55 Years

Inflation : 8% p.a.

Current Monthly Expenses: 1,00,000/-

Life Expectancy: 80 Years

Rate of Return: 12% p.a.

Retirement is a new way of life in many ways. Apart from adjusting your work life, you also need to adjust your financial life to the new reality. Here’s what you need to do to build your retirement corpus, if your current monthly expenses are Rs.1,00,000/-, and you expect to retire in the next 20 years.

If you consider the rate of inflation at 8 % p.a., you will need to build a retirement kitty of Rs. 9,35,18,569/- (Rs. 9.35 Crore) to live comfortably. 

You will need to invest a lump sum of Rs. 96,94,767/-  or invest Rs. 94,534 each month, at an annual return of 12 %, in order to enjoy your golden years.

For getting 12% p.a. return, you will have to invest in Equity Asset Class. 
A balanced portfolio can also achieve this goal.

The only problem which can occur post retirement is you will still have to keep allocation in Equity Asset Class. If you do not want to do that post retirement the investment amounts and retirement corpus amount  will change drastically.

6 Mistakes you should avoid while Investing in Mutual Funds

6 Mistakes you should avoid while Investing in Mutual Funds:

1. Investing in a Wrong Fund
   One of the biggest mistakes is a wrong judgement call. Ensure your MFs meet your investment objective. Otherwise, that investment will not work for you.


2. Herd Mentality
   Your friend or neighbor or relative suggested a Mutual Fund and you promptly invested without any research? What if it does not suit your risk profile or investment objective? Avoid following their advice blindly. Kindly do your due diligence.


3. Taking concentrated bets
   Mutual Funds are diversified, but that does not mean you invest all your money into a single Fund. You should always diversify further by investing in a Equity, Debt and Balanced Funds according your investment horizon.


4. Stopping your SIPs in market Fall
   Panic reactions are investor's worst enemy. If you did your due research and trust your analysis, then don't stop investing or sell in a panic. There will always be tough times. Consider these falls as opportunities.


5. Dividends Over Growth
   Unless you really need a secondary source of income, it's best to go for Growth options. This is the way you compound your returns in the long term. And compounding is a Magic.


6. Falling in Love with Laggards
   If your Mutual Fund is consistently under-performing to its peers and benchmark too for more than 4 quarters. It is time to exit that option 

You can go through following video to understand other financial mistakes you should avoid.

Importance of Financial Planning

Importance of financial planning and the steps involved.

Financial planning is the process of utilizing your available financial resources in the best possible manner so that you achieve your goals.

Why do you need to have a financial plan?

1.     Inflation Impact:  When your mother goes grocery shopping and comes back, I am sure you must have heard her saying. I bought rice today at Rs 50 per kg , I used by the same rice at Rs 10 per kg when you kids were younger. This is inflation. Steady increase in the prices of goods and services. As the prices of these goods and services increase so does the cost of our future goals. If today it costs 25 lacs for higher education abroad, it would cost 73.4 lacs when your kid grows up after16 yrs, if inflation is at 7%. Inflation has a compounding effect.

2.     Contingency fund availability: You may never know when the job scenario turns gloomy. Also the yearly hikes are not in line with the prevailing inflation. And so planning becomes of utmost importance.

 With elderly parents in house and unexpected medical instances on the rise, it calls for keeping contingency fund ready for such situations. When people don’t plan for future goals and have surplus income, second home is the preferred choice of investment which is a very illiquid asset….financial planning helps you take into account not just your long term goals but even your short term needs.

A thumb rule suggests keeping 6 months’ salary in highly liquid form for this need.

3.     Retirement: Like our father’s generation, we will not be supported by any pension structure and so planning for the retire life is a crucial aspect. With life expectancy on the rise, it becomes all the more important to plan your retirement

You would need a retirement corpus of 5.2 cr, if your monthly expenses are @ 50 K today, if you wish to retire at 55 and may live till age of 80 yrs.

4.     Insurances: Financial planning helps you know your worth, which in turn helps you asses your insurance needs which shield you family from financial loss in case of life loss or any medical condition.

This gives you a sense of security as you are adequately covered.

5.     Investments are tied to goals: Since any money decision impacts your financial planning, you keep your money decisions in line with the financial plan like decisions on tax planning, insurances, etc. This also keeps you away from ad hoc investments. Also you do your tax planning in advance in line with your goals.

6.     Cash flow management: Financial planning  helps you manage your inflows and outflows in a way that you utilize your resources in the best way to achieve your goals. Helps you cut out unnecessary expenses and gives a strong hold over your financial situation.

7.     Achieving your financial goals: You achieve your goals comfortably as you start early and have a solid plan to meet your goals.

Now that you know why financial planning is essential, below are the steps which would help you put a financial goals together:

Steps for putting together a financial plan:

1.     Understand your current financial status

2.     Write down your goals

3.     Select investment avenues for your goals

4.     Implement your investment decisions

5.     Review your investments periodically

Balanced Funds

Now a days, Fixed Deposit interest rates are going down so does not seem to be an attractive investment option. So, investors are looking for other alternatives. They are looking at Balanced Funds as an alternatives.

They should keep in mind following points before investing in Balanced Funds.

 1. Equity Allocation : Balanced Funds invest more than 65% in equity Asset Class. Equity comes with volatile nature. In shorter duration, you can see your portfolio in red.

 2. Investment Horizon : Your investment horizon should be more than 3 to 5 years.

 3. Taxation : According to current taxation rules, Balanced funds are taxed like equity funds. So upto 1 year Short Term Capital Gains tax of 15% on Capital Gains. Post 1 year, there is no tax applicable.

 4. Debt Allocation: Upto 35% allocation to debt asset class. No taxation on this allocation. It is like tax free fixed income investment post 1 year of holding.

 5. Dividends: Monthly Dividends are available.

 Please go through following video to get a complete idea about Balanced Funds.

 Following are few Balanced Fund Examples:

1. ICICI Prudential Balanced Fund
2. HDFC Balanced Fund
3. HDFC Prudence Fund
4. Aditya Birla Sun Life Balanced 95 Fund