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3 Rules of Thumb to Better Plan Your Finances

Team Jar
December 29, 2022
3 Rules of Thumb to Better Plan Your Finances

Do you want to turn things around before your bills catch up with you? In this article, here are seven personal finance rules of thumb that will help guide you in spending and saving money.

Money is one of those topics that most people would rather not talk about, but that doesn't mean that you can ignore it. Money is important whether you're fresh out of college, wish to buy your first car, are newly married, or are a retiree who wants to live comfortably during your “golden years.”

In fact, money is a crucial factor in all stages of life, and you need to follow a few personal financial planning rules of thumb to create a healthy financial portfolio.

Hopefully, some of these tips will help you out as well! These are a few simple rules to improve personal finance for beginners, and you can start following them today.

  1. 50 – 30 – 20 per cent rule

In the early 2000s, US Senator & former Harvard lecturer Elizabeth Warren with her child, Amelia Warren Tyagi, established the 50/30/20 structure in the New York Times blockbuster "All Your Worth: The Ultimate Lifetime Money Plan." This is intended to serve as a road-map to guarantee that you secure all your financial areas while allowing room for improvisation.

The authors recommend dividing income into three categories: 50 per cent for fixed costs, 30 per cent for consumption, and 20 per cent for savings and debt repayment.

This is among the best personal finance tips you will ever receive. Utilize this as a starting point for your salary and then adjust from that.

Being on a budget rule doesn't mean you need to be frugal or spend less when you need to; it simply means you need to know where to spend how much money. It is about instilling in you that the secret to avoiding bankruptcy — and, eventually, earning wealth — is to live below your limits.

  1. 30 per cent or less amount on housing

It is a rule of thumb that you should not spend more than 30% of your income on your rent. If the spending is more than 30%, it could have a heavy toll on your expenses as your salary might not increase commensurate with your increase in rent.

  1. Emergency reserve rule

Even if you are not a financial adviser, you should understand why this emergency reserve rule of thumb exists. In general, it goes as follows:

  • If you are a single earner in the family, you should save at least six months' worth of costs.
  • If you have two income sources, you should have at least three months' worth of costs saved.
  • If you are a single earner in the family with a separate source of sizable revenue, you should save at least three months' worth of costs.

The notion is that the lesser your sources of income are, the more cash you need to save away.

An emergency reserve refers to funds you can use fast if you have a health emergency, your automobile requires an engine replacement, you lose your work, or any other large, unexpected cost arrives at your doorstep.

For the great majority of individuals, the question is not whether something will occur that would jeopardize their financial security, but when.

Typically, people need at least two years to save enough for six months of spending (including fixed expenses as well as variable expenses). You ought to have cash on hand at all times.

Thus, you should constantly be saving. Most individuals keep their emergency money in a high-yield bank savings account, which produces a tiny return and is easily accessible.

This emergency savings account can be the single most important contributor to your feeling of financial safety during this year marked by a worldwide health crisis, huge layoffs, as well as an unstable stock marketplace.

Apart from these three big rules of thumb, there are some other major rules that you can follow in order to have healthy financial planning.

  • Rule of Stock Allocation

The distribution of assets is based on this premise. According to this concept of personal finance investing, persons should possess a proportion of stocks equivalent to 100 less than their current age. So, divide your age by 100 to determine what percentage of your total portfolio should be devoted to stocks.

For instance:

If your age is 40 years, the proportion of equity in your portfolio should be (100-40=) 60%.

If your age is 20 years, the proportion of equity in your portfolio should be (100-20=) 80%.

  • Rule of Life Insurance

Personal finance management might also be governed by the life insurance guideline. The ideal approach to compute the minimum value assured in a term life insurance policy needs to be ten times the annual salary, which means that if your current yearly pay is INR 10 lakhs, you must have life insurance coverage of at least INR 1 crore.

  • Rule of 70

An essential component of financial planning is keeping track of the investment's depreciation value in order to determine if it is lucrative or otherwise. You may determine how quickly the worth of your investment can be reduced to 50% of its present value by dividing 70 by the present rate of inflation. 

It will assist you in determining if a certain investment is your asset or your liability. Inflation at a rate of 7%, for instance, will diminish the value of your money to 50% in ten years.

  • Rule of 72

Everyone wants to boost their salary and save more money. Divide figure 72 by the yearly rate of interest to figure out how many years are necessary to double the cash. Divide 72 by 8 to obtain nine years if you need to understand how long you will need to double your cash at an 8% interest rate.

Likewise, it will require 12 years with a 6% rate of interest and 8 years with a 9% rate of interest. This will assist consumers in determining the period of time required to see their wage double and preparing their expenditure charts appropriately, so they don't face money shortages.

The Bottom Line

Based on these personal money management tips, it should be clear that the best tool for managing your money is to make a plan. If you follow the same general guides that I have outlined here, you'll have a good idea of what to do with your money.

However, there's no reason why you can't adjust those tips to fit your circumstances. After all, personal finance 101 states that everyone's financial situation is different, and your circumstances are unique as well. With that in mind, good luck managing your personal finances!