We need to have some kind of plan to be successful financially. It doesn't need to be complicated, but some thumb rules should guide us into our journey. It will be different for each and every one of us. There can never be one financial plan for everyone in this world. In this article, I try to lay down what are my personal financial thumb rules. Before continuing, it is vital to understand that these are not set in stone! They can change anytime. Further, they are more of a guide than the strict rules. Now here is the list:
Save a minimum of 40% of my monthly income. This is compulsory for me. Every month I transfer the amount to my brokerage account and savings account immediately after I receive my income. For few months, I try to save around 60% - 70% to build up more savings. If we want to achieve early financial independence then 40% is a minimum - there is no alternative!
Don't buy a house until I have 60% of the downpayment. If I take a home loan, then the EMI should not be more than 30% of my total family monthly income. House is an emotional decision. Don't consider it as an investment. Instead, it is a liability masquerading as an asset. It is okay to buy a house but understand that it is not an asset in the long term. The cost that we spend on interiors, loans, maintenance, and general residential expenses is far more than the return. My personal preference is to rent in Mumbai or Thane area and have an independent house in the outskirts like either Nashik or Nagpur or somewhere close.
Buy a car only if I can pay in full, and it shouldn't cost more than 8% of my liquid net worth. The price of a car drops 25% as soon as we walk away with it from the showroom.
Out of total equity exposure, keep a minimum of 50% to 60% in diversified index funds. This is insurance against my individual stock picks and trading strategies. It means that even if I fail to generate an adequate return through my discretionary methods, index funds should take provide decent returns for half of my portfolio.
Keep at least 6-10 months of money in a savings account. This is my emergency fund. If I lose my income, then this will be useful. I have multiple credit cards with a total combined limit of more than 20 lakhs, which should take care of any other emergencies.
Have a decent health care plan with generous limits. My health insurance covers 50 lakhs plus an automatic top-up of 50 lakhs next year if I don't use it in the previous year.
After saving 40% to 60% of the income, I spend the rest of my income without guilt. We sometimes tend to over-save and ignore enjoying life. I am in no way a frugal person. I seldom do enjoy good food, decent hotel stays, and fancy restaurants. My indulges include an iPhone, an iMac, a weighted blanket and some other expensive products. But I don't buy them at the cost of my savings. I don't spend much on clothes or a fancy car to spend on a few other things that I enjoy. I use that remaining portion of my income to spend on anything I want without any remorse.
Have friends or colleagues who'd be interested in Personal Finance insights? Send them here.
I’m on Twitter, @virajkhatavkar
If you have feedback, feel free to write me at firstname.lastname@example.org. I guarantee I'll read it, and likely will respond.