I recently read an article on the TFL (The financial literates) regarding 10 rules of thumb for financial planning (http://www.tflguide.com/2011/09/top-10-financial-planning-rules-of-thumb.html). It is a must read for every one remotely interested in money. However, I had my own views for the rules presented there, which i list here. do not read my conclusions in isolation before going through the listed article, otherwise nothing would get conveyed.
My conclusions on rules stated in the article:
Rule 1: the asset allocation cannot depend only on your age (that says that the younger you are, the more risk apetite you might have). one should also take into consideration the present financial standing - an unmarried single-child male in his late 20s or early 30s living with parents in their owned home will certainly have more risk apetite than a married young person living off his income in a rented house with his wife and possibly kids; similarly, a businessman willing to park some money to earn extra income has more risk apetite than a salaried person with only salary as his source of income, even if other things like age and dependents remain the same.
Rule 2: I agree to it if one has not sufficient amount of insurance cover in the form of term or health and/or personal accident policies. if these things are in place to an adequate amount then one can stick to the lower limit of amount equal to three months' EXPENSES.
Rule 3: retirement will be most likely at the age of 50+. by that time, thanks to our spoiled lifestyle, we will need to probably spend more on our health that what our parents we do today as a percentage of their income. there will be expensive medical procedures/treatmens to take care of, thanks to a more laid back life, partying harder and merry making. Probably expectation from children and thei families to receive a gift at the rime of retirement, or more importantly that long promised time in reclusion with your spouse at some distant hill-station, or frequent visits to relatives out of your home city. these all actually lead to more expenses rather less.
Rule 4: probably right...but again depends on the lifestyle and city you live in.
Rule 5: probably modified rules are better than the original one.
RULE 5.1: What about health insurance?????? Opt for a cashless mediclaim policy (family floater) along with a personal accident benefit policy (for each earning member at least). Include your aged parents in it too.
Assuming you have dependent parent(s), are married and have 0/1/2 kids, then the following may help:
It must be around 1x to 2x of your annual income if you are in age bracket of <35.
If you are between 35 and 45, make it (increase if already prior cover is in force) 2x to 3.5x.
If you are in the age bracket of 45+ make it (increase if already prior cover is in force) 3x to 5x. This is because that with passing age the number, severity and therefore costs of medical expences will rise meteorically.
Rule 6: Going for a new (read first) house to live in, the rule is quite impossible to achieve in most Tier I and II cities in India. one of my friends recently bought a flat in Jaipur, in a new locality, for just 18Lakhs, while hias earnings are around 4L pa. But, the real estate prices have risen very steeply in recent years. Your suggestion of 2-3 times would have not got him any deal. Therefore save atleast 30-50% of the final perspective cost of your home (as self contribution) and then go for a home loan of upto the balance. never exhaust your complete limit of 80-85% from bank, in case of such a volatile economic conditions.
Rules 7 and 8: Maximum EMIs practically often break the ceiling suggested. Like in the above example of rule 6, my friend is to pay almost 48% of his month;y take home as EMI for home loan. As far as auto loan is considered, although i would agree to your RULE 8, but wold like to point the fact that in this time of pomp-and-show, many people have to keep big cars to keep big company/clients and carge big bucks for their job. It has become a marketing gimmick of sorts.
There must, however, be a cap on the EMIs for non-appreciating assests (home loan) or non-productive assests (auto loan on a decent ride) say not more than 5% of NET monthly income. These may include credit-cards, personal loans, travel loans, and the like. However, loan on the childrens' education should be considered as a productive loan.
Rule 9: probably right, but for finding a particular multiplier for a rate of real income (rate of returns - rate of inflation) assuming it remains steady for the whole tenure the rule of 72 can be modified as follows:
72/(RoR-RoI)
Where, RoR is the expected rate of return and RoI is the rate of inflation. If RoI is greater than or equal to thr RoR, then do not expect your money to grow over any time period. it is better to consume it now than to save it it for tomorrow.
Rule 10: The modified rule of 12/8/6 seems to hold if one looks at a long-term period BEFORE 2008. But post QE1 and QE2 by US Fed and ECB (European central bank), the rising liquidity has raised the comodity prices (read inflation) to close to 10% levels for last 2 and a half years and it doesn't seem to be coming down anytime soon. Also the tighetening of the interst rates by RBI, in order to keep the real rate of return in non-negative teritorry, have lead to bond yields (FD) in the range of 9.5% to 11% range. So for present dcenario we can not see this rule eorking. But, over a long term of say, 5 to 10 years from FY2012 onwards it may hold.
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Hope this might help some readers in getting their finances in order. Feel free to contact.
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