Wish you and your family very Happy New year 2020 !!!
We have master health check up schemes to check our health yearly once. I thought there is a need for financial health check up also yearly once. In medical health we have BP, Sugar tests etc with “ normal “ level indicators. Likewise I have identified a simple & easy system to measure our Financial Health with indicators which a layman can also apply easily. If You are pass on all the indicators then you are financially secured & if you are not pass even in minimum indicators, don’t worry and get it stabilized during 2020.
We do not know how much we can spend and how much minimum amount we need to save out of our monthly income.
50% can be spent on household expenses such as rent, electricity, groceries etc
Minimum 20% must be saved/invested for future in Mutual Fund SIP, Gold ETF, PPF,RD & FD etc Balance 30% shall be utilized for conveyance, garments, entertainment, hotel expenses etc.,
An earning person should be sufficiently covered for his life. If a sole earning member is no more then his dependents will be suffering financially to meet out their day to day expenses and will be in debt risk of home loan, car loan etc Hence, earning member of a family should be covered minimum 35 times of his annual income. For example If a person is earning Rs.10,00,000 per annum then Rs.10,00,000 x 35 = Rs.3,50,00,000. I strongly suggest to have only Term Policy because you can be covered for higher amount at lesser premium. That too you need to take this policy at early stage of life atleast before age of 30.
3. 20 Times Annual Income for Retirement Life
After the age of 40 only many of us will think about retirement life. If you want to live your retirement life peacefully with same present life style without anyone’s financial support then 20 times of your present Annual income should be made available as corpus money. Hence plan early and start save under National Pension Scheme, MF retirement schemes etc
4. EMI’s should be within 40%
We used to buy right from Air Conditioner to Home everything under EMI. Make sure total EMI’s are maximum 40% of your monthly income. Whenever you want to pre close loans make sure to close higher interest loans first.
5.20/4/10 Car Formula
If you want to buy car then apply this formula. 20 is 20% of car price you should keep as cash reserve towards down payment. 4 is “with in maximum of 4 years close your car loan EMI”. 10 is “ your car loan EMI, fuel expenses should be maximum 10% of your monthly income”
6.How much risky investment ?
Most of us want to invest in Equity shares directly because it’s return is huge at the same time risk also high. But do not know how much we can allocate out of available sources. Simply deduct your age from 100. If your age is 35 then you can invest 65% of funds in equity shares.
7.How much we can use out of Retirement funds in case of emergency ?
Out of Corpus money created for retirement you can use maximum of 4% in case of emergency “in a year”. Otherwise you may fall short after retirement.
8.20/5 Formula for Home Loan
Here 20 is 20% funds you should keep as Initial Down payment. Your total payable EMI amount should be maximum of 5 times of your annual income. For example Annual Income is 15 lakhs hence for 5 years it is 75 lakhs. You are planning to buy house costing 80 lakhs. 20% of 80 lakhs is Rs.16 Lakhs which you need to keep for initial down payment. 80% of 80 Lakhs is Rs.64 Lakhs. Here 64 lakhs is well within 5 years Annual Income.
9.Investment return Doubling Formula “ 72 “
Do you want to know after how many years your investment will be become double ? If you invest @ 8% interest per annum then 72/8=9. I.e after 9 years your investment will be become double.
10.Investment return triple Formula “114”
Do you want to know after how many years your investment will be become triple ? If you invest @ 8% interest per annum then 114/8=14.4 I.e after 14 years 4 months your investment will be become triple.
11.How to find Future value of Money ?
“70” Formula – A price of a product is not constant and it is keep on increasing. Example : Gold. We need to find out Inflation rate first which is published periodically by RBI. If you take current Inflation rate as 5.5% then 70/5.5= 12.7 i.e after 12 years 7 months your money value will become half i.e If you have Rs.10,000 today after 12.7 years its value will be Rs.5000 only. The reason to find out this, is to calculate how much you should save after adjusting inflation rate.
12.What is your Networth ?
Normally a business Organisation is valued by its Networth. Likewise For an Individual also Net worth can be measured. Your age should be multiplied by annual income divided by “10” For example Your age is 30 and Annual Income is 10 lakhs then 30x10/10 = 30 Lakhs must be the Networth. Networth is the total of your bank & cash balance, shares, MF & FD savings and gold etc., When calculate Networth as a thumb rule ancestral property and house property should not be considered.
13.Portfolio Restructuring Formula 5/25
For example if you keep 10 Lakhs in portfolio consisting 70% Equity shares 10% Gold & 20% in Debt funds. When there is valuation change of 5% in equity shares you need to restructure it. Because major 70% is the allocation for equity shares. But In the case of gold the overall allocation is only 10% hence 5% change itself is 50% of it . Hence we should restructure it when there is change of 25% value itself out of total money invested in gold.
Your Minimum Monthly expenses +EMI X 6times you need to keep as emergency fund then only you can manage without taking loans. Your Monthly fund requirement is 50K then 6 times of it i.e Rs.3 Lakhs must be kept as Emergency fund in FD, Liquid MF etc
15.Bonus 10:90 Formula
Whenever you get Bonus you can utilize only 10% of if for your expenses. Balance 90% must be used to payback higher interest loans. If there is no loan then must be invested for future requirements.
16.60:40 Asset Allocation
Whenever you invest allocate 60% in Liquid assets ( convertible to cash quickly ) and only 40% in Illiquid assets
17.Credit Card Formula “30”
Whatever be your Credit card limit, use only 30% of it. This will help you to keep good credit score and will be a standard discipline in utilization of card.
18.Maximum of 2 Credit cards
Do not accept Credit cards even some says it is free. Each card you need to pay annual charges and multiple cards may hit your CIBIL score. Maximum 2 Credit cards only suggested to an individual person.
19.How much should you Owe ?
You should take loan maximum of 50% of your total assets. That also when you are approaching retirement age, you need to make Loan Zero and assets must be debt free.
20.How to invest Retirement Funds ?
Out of retirement funds, 70% should be invested in risk free standard return investments and balance 30% only can be invested in high risk/high reward investments.
Apply these formulas during 2020 and have a wealthy future.