Everyone has a unique situation, and there are no concrete financial numbers that define success, but there are some rules of thumb that can help you gauge your progress. While following these rules wont guarantee success, they will put you on the right track.

What should be my asset allocation or how much equity should I have?

This is the most common rule of thumb which is used in investment world. Rule says Equity percentage in your portfolio should be equal to 100 minus your age or in other words debt should be equal to your age. For eg if you are 30 you should have 30% of your investments in debt & 70% (100 – your age) in equity. This doesnot take care of risk appetite, risk tolerance or how far your goals are.


How much emergency fund I should have?

Emergency Fund helps people in case of sudden loss of income, medical emergency etc. Thumb rule says one should have emergency fund equal to 3 to 6 months of monthly expenses. You can keep it at 3 month if you are a government servant but in case of private job or profession you should keep it on the higher side of the range. Make sure you don’t use this amount for day to day needs/wants. For retired person emergency fund should be equal to 1 year of expense.

How much money will I need in retirement or how much corpus I should build?

You should have 20 times your income saved for retirement and plan to replace 80 percent of pre-retirement income. But here retirement means a retirement at age of 60 & life expectancy of 80 – and a conservative lifestyle. Essentially the formula is:

Financial Independence = annual income requirement X 20

The formula is based on two centuries worth of returns in the stock market and the real rate of return (5% annually) you can expect to earn after taxes, expenses and inflation.

If you have 20 times your annual income requirement, it means that with the prescribed withdrawal rate of 5% yearly from your nest egg and the annual expected net return on your investments of 5%, you will never run out of money. But now things have changed & you would have dream/planned lot of things for retirement.

How much I need to invest every month to achieve retirement goal?

Pay Yourself First: Aim to set aside at least 10% of your take-home pay
Paying yourself first is the most important bill you will pay each month.

The best way to implement this rule is to make it automatic. Have 10% of your take-home pay pulled from your paycheck and deposited into a separate bank account or in money manager fund.

If you already have a well-funded emergency fund and your short-term goals have been funded, you might funnel all of the ten percent into a retirement plan. Of course if you set aside 10% in your retirement plan, you will be contributing pre-tax which works out to be more than 10% after-tax.

If you have just started to work & would like to have a very simple lifestyle & retirement at age of 60 you can do it with saving 10% of your income. If you are planning for an early retirement start with 20% savings. Other rule says if you are in early 30s Save 10% for basics, 15% for comfort, and 20% to escape. If you are late by decade add 5% more in each category.

How much insurance should I have?

Here insurance means insurance. Rule says one should have sum assured of 8-10 times of his yearly income. I think this rule is far from perfect but still can be used as starting point. This does not take care of any of your goals, liabilities & even complete expenses.

Some planners suggest even more than five to eight times your annual income as the level of coverage you should carry. My suggestion is that you get your financial house in order, which means getting your net worth and cash flow statement together, and go talk to a financial planner, ask them how they are compensated to keep them honest with the advice they are giving you.

Please note that this factor or rule of thumb could be much higher, depending on the number of years of income you will have to replace. The highest factor I have seen is to multiply your annual after-tax income by 20.If you were to die and wanted to make sure your dependents would continue to receive exactly what you brought home each month, they would need to completely replace your income forever. According to the Twenty Factor Model, having an insurance policy with at least 20 times your annual income will do.

The Short-Term Debt Rule of Thumb:

So-called Bad Debt should not equal more than 20% of your income

Short-term debt includes your car and student loans, as well as your credit cards and other forms of debt. Essentially everything except for your mortgage. You need to list all your outstanding liabilities and their respective minimum/monthly payments. Now add up the minimum/monthly payment amounts and you come up with a figure.

Take this number and divide it into your monthly take-home pay.

If the result is more than 20%, you are carrying too much revolving debt. New entrants to the workforce or recent graduates often have a higher debt-to-income ratio because of their student loans and entry-level jobs that pay low salaries.

Compulsive spenders also have a problem because they spend every rupees they make.

You should aim to put at least 20% of your net pay toward paying down your outstanding debts. If you cease to add to your short-term debts today, you will find that you can pay off most of your short-term debt anywhere from 3-7 years.

How big should be my House?

The value of house should be equal to 2-3 times of your family annual income. So if you & your spouse are earning total Rs 20 lakh – you should buy a house in Range of Rs 40-60 Lakh.

Maximum EMI that I can have?

Ideally 0 will be the best answer but few of the big assets like home require some loan to buy them. Experts agree that your EMI should not be more than 36% of Gross Monthly Income at any point of time. It should be even lesser when you are close to your retirement. If you want to talk about home loan EMI, it should not be greater than 28% of your gross income.

Why 36%?

Well, banks like to see that the cost of your monthly mortgage payment, taxes, insurance, and utilities will not place an undue burden on your finances.

In short, they calculate the cost of living in your home and know that if you are exceeding 36% for your housing costs, you have probably bitten off more than you can chew.

Regardless of what your current percentages are, aim to reduce these percentages over time. Just because a bank is willing to lend you up to 28 percent of your gross monthly income, it doesnot mean that you should borrow that much money to buy a house.

The less money you borrow, the faster you can pay it back and the higher your monthly cash flow will be (because you are spending less on your mortgage). The less you spend monthly, the more you will have to invest for your future.

Rules of thumb for buying a car

This is one of the biggest purchases after your home. And this is depreciating asset – today morning you purchase a car for Rs 10 lakh & by the evening it will be worth Rs 8-9 Lakh. After 5 years it will not be even of half value but still you keep buying cars regularly – buy at 10, sell at 4 & loose 6. (repeat the cycle) There are few rules that you can follow:

Value of car should not be more than 50% of the annual income of the owner.

Purchase a used car or buy a new & use it for 10 years.

While buying car with loan stick to 20/4/10 – Minimum 20% down payment, loan tenure not more than 4 years & EMI should not be higher than 10% of your income.

Rate of return Rules of Thumb

In how many years my amount will double?

Its a very simple & most common rule – if you divide 72 by rate of return you will get the number of years in which your money will double. For Eg. If you expect a rate of return of 12% you money will double in 6 years (72/12=6) & what about if rate of return is 8% – 72/8=9 years. This can also be used in reverse order at what rate your money will double in 5 years – 72/5=14.4%

Rules similar to rule of 72:

Rule of 114 & 144

These can help you in how many years your money will be triple (114) or quadruple (144) at some rate of returns.

Rule of 70

You know it or not but inflation is your biggest enemy – rule of 70 will tell you in how many years value of money will be half. You just need to divide 70 with rate of inflation so if rate of inflation is 7% – 70/7=10 years. So in 10 years your Rs 100 note will be worth Rs 50.

Rule 10/5/3

This is a US rule of thumb which says in long term you can get 10% return from equity, 5% return from bonds (let’s say FDs) & 3% from the t-bills (liquid funds – these returns are more or less close to the range of inflation). Indian economy is growing at some different pace & even inflation numbers are different. Can we safely say if inflation is 6% (t-bill rates) we can get 8% from the fixed deposits & 12% from the equity or in other words – in long term equities will deliver twice the return of inflation. Try combining Rule of 72 with this rule – you will get some amazing numbers.

The Charity Rule of Thumb:

Give away at least 10% of your net pay every month.

Most of us think that there is not enough money to go around. We live in a state of scarcity instead of a state of abundance. We think that if we give away ten percent of our income each year, we cant possibly make ends meet or be able to afford a decent retirement.

I understand the fears, but if you put all the previous rules of thumb in place, you should not have to worry too much about making ends meet.
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The early bird guide to planning :


Conventional images of the retired would have them pruning roses, playing golf, sipping tea or strolling by the seaside. But we might not be able to lead such a leisurely life after retirement unless we have planned wisely. "The most important part of retirement planning is knowing when you can retire and when you cant," says Kapil Mehta, CEO, DLF Pramerica Life Insurance. So, as the first step, youll need to find out when you will have enough to live on without being compelled to return to income-generating activities when you are over 60. This will help you decide on an adequate retirement income and then you can work towards creating a corpus that can provide it.

While calculating the ideal retirement income, consider when you wish to retire, how long the corpus should last and what kind of lifestyle you wish to sustain in retirement. Also, factor in rising prices, the rate of inflation and increased interest rates.

A rule of thumb is to save 15 per cent of your pay for retirement regularly and over a long period of time. However, if you start later, you will need to save a higher percentage of pay (see How Much to Save). Which is why someone like Anirban Bora should, ideally, not wait much longer. When asked about his retirement plans, the 28-year-old Kolkata-based engineer laughs it off. "You must be kidding. Who is thinking of retirement now? It is too far away," he says.

This mindset is not exclusive to Bora. In fact, a recent Nielsen Consumer Confidence survey covering 14,029 consumers in Europe, Asia and North America found that nearly six out of 10 Indians put their spare cash in savings, but a mere 4 per cent drop it in the retirement kitty. With increased life expectancies, thanks to advances in healthcare and improved lifestyles, this corpus has to last a far longer period than ever before. This is why experts reiterate the importance of planning early for retirement.

Starting early lets you save more as you have a longer working life ahead of you. It also allows the power of compounding to work in your favour. "Its a lifelong process, not something that you plan for when you are nearing it," says Rishi Nathany, Kolkata-based financial planner and Director, Touchstone Wealth Planners.

The other advantage of starting early is that it gives you time to correct any flaws in your financial plan. "The advent of nuclear families, rising healthcare costs, and fluctuating interest rates and stock market returns can make some of the best-laid retirement plans go awry," says Vishal Gupta, Director, Marketing, Aviva Life Insurance.

No matter when you decide to start, make sure your corpus has two essential components: Liquidity and growth. Liquidity will give you regular income and cover contingencies and growth will ensure that your corpus takes care of future expenses and protects your standard of living. "Unlike the working years, when you have a steady source of income, the retirement years will see you creating a mix of regular income streams to manage essential expenses through regular cash flows," says Rohit Sarin, Cofounder and Partner, Client Associates.

You might also need lump-sum amounts to meet specific capital requirements, say for home repairs or travelling abroad to visit your children. The most important aspect of a retirement plan is that it should last you a lifetime. Just putting together a large corpus is not enough. You will also need to factor in the returns you will earn on this corpus, the prevailing rate of inflation and how much you withdraw from the savings pool.

Obviously, some of these factors cannot be quantified or controlled. But others can be managed well. Heres how you can do it:

Own a Home: Any planner or adviser will tell you that for a retirement plan to work, you will need adequate medical insurance, as well as a home. Both provide security in old age. More importantly, a house could also be a potential source of income. Take Bangalore-based A.S. Mahadevan. The 52-year-old plans to retire in four years and decided to buy a house to augment his income stream. He lives with his parents and knows that he will always have a roof over his head. He took a home loan to buy a house, rented it out and uses the rental income to pay the monthly installments.

R. Muralidharan, a 55-year-old, Delhi-based scientist, has followed a similar strategy. "Both my children are in the US pursuing higher studies and that takes care of their careers. I am soon going to move into a bigger home which will be sufficient for me to retire in with my parents," he says. To buy the bigger house, Muralidharan sold his small apartment and took a home loan to make up the shortfall. Some planners believe that it is risky to take a home loan at this age, but Muralidharan is convinced that his gamble will pay off. The bigger house is more in line with the lifestyle he wants after retirement, and the tax benefit hes getting on the home loan is icing on the cake.

But what if you cant afford a house? Rathnesh Rao has reason to worry. "I had other commitments earlier in life and am yet to find a house that I can afford and retire in," says the 50-year-old Hyderabad resident. Its never too late to start, but you have to be aware of the handicap youll start with. "In your 50s, you cant hope for stupendous growth, and if you have been risk-averse all these years, you are unlikely to be risk-friendly now," says Sarin, the Client Associates Partner. In such cases, you have to either rescale your financial goals, including compromising on the standard of living you plan to maintain, or look at a second career to try and build the nest egg.

Insure Your Health: Health insurance is essential for your retirement. Like most aspects related to financial planning, it helps if you get this early on. That is, when insurance companies are willing to give you medical cover with few questions asked, and your premium payments are also manageable. Leave it for later, and you might not be able to get adequate cover. Moreover, youll have to shell out a fortune on premium.


Investment Strategy: A standard retirement plan consists of two parts - wealth accumulation and withdrawal. In the accumulation phase, ensure that you have a good mix of financial assets, be it debt or equity, and real assets like property, gold, collectibles, etc. Those who are employed in companies that offer the provident fund facility, by default, have been saving for retirement.

This is an assured return scheme and takes care of the debt component of your retirement planning corpus. "In your late 40s and 50s, consider choosing investments in debt instruments to get an asset allocation that will have adequate cushion to manage equity volatility," says Zankhana Shah, Mumbai-based financial planner and Founder, Money Care, a financial planning firm.


However, for wealth creation, one should consider equities as an option. "Once you have assessed your risk profile, you can invest heavily in equities and leave the debt portion to your provident fund contribution," advises Shah. A mix of equities, equity mutual funds and equity-linked insurance products that can serve the purpose of wealth creation will fit the retirement planning stage.

All of this still leaves you with the element of surprise-the unexpected event that could demolish your carefully constructed plan. This is why its essential to create a flexible plan that can be reprioritised. For instance, if you save 25 per cent a month for retirement but have to bankroll an unforeseen expenditure, you can cut back the nest egg contribution to say 5-10 per cent for a few months and then scale up at the first opportunity.

Yet, there are several people who have spent far more than anticipated on their childrens education or, perhaps, on an aged parents healthcare. "Events such as these might force you to draw from your retirement savings and look at growth investments late in life," says B. Srinivasan, a Bangalorebased financial planner. This is among the cardinal sins of financial planning.

Financial planners suggest that if you do not have a specific fund or plan for a goal, its better to go slow on an existing plan than to wipe it out completely. "This way, you dont touch your corpus for each of your financial goals," he adds.

Obviously, planning for retirement is more than just putting away a tiny sum in a pension plan. Start planning early, and plan smart. This is the only way you can save enough in your retirement fund to let you prune the roses in your sunset years, without a care.

MAKING UP FOR LOST TIME

Try these strategies to build a retirement corpus in a short span of time.

Prepare to stretch your work life
Think of a second career, pushing back your retirement age to at least 65 years. If you have started planning really late, consider working till you are 70.

Plan for adequate cover and insure all risks
Cover all risks, be it life, assets, health or business. Shop for high-value covers with the least possible premium since you cant afford large outflows.

Prioritise your goals
If you need to choose between your childs education and your nest egg, consider taking an education loan to bankroll his studies while retaining your retirement plan.

Buy a house
Experts estimate that housing accounts for about a third or more of a monthly budget. Late starters need to get a house as soon as possible.

Create post-retirement income
A job that gives you good retirement benefits takes care of half your problems. But also invest in equities for growth. It wont be a risk since you will probably postpone retirement.
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Source : BT

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10 Commandments For Financial Success :

 

1. First of all Protect Yourself, Your Family & Your Assets. Because.. You Are Your Most Important Asset.


2. Pay Yourself First, NOT Your Bills. (Minimum 10%-30% For Your Retirement Without Any Exception).

 

3. Avoid Bad Debt (Credit Card Loans, Personal Loans etc.)

 

4. Use Good Debt judiciously (Yes! There is Good Debt like home loan, Education Loan.)

 

5. Keep Track of Your Expenses. Live Within Your Means. (And Strive To Expand Your Means.)

 

6. Save Regularly & Invest Wisely Based On Your Goals.  (Do Not Make Any Investment only forTax Saving. Just Ask Yourself: What if There Were No Tax Saving, Would You Still Make That Investment. More Than 90% People Make Mistake Here.  Sad But True!)

 

7. Diversify! Diversify! Diversify! (Do Not Put All Your Eggs in One Basket.)

 

8. Monitor & review your investments.

 

9. Make adjustments as may be required from time to time.

 

10. Last But Not The Least Do IT Now. There Will Never Be Any Better Time Than NOW To Take Charge of Your Financial Destiny.

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