Friends, if we wish to create wealth in the long term then the most important thing is Financial Discipline In fact, according to Warren Buffett Discipline is more important than intelligence. But a question arises, How to maintain Financial Discipline? For this, we’ll discuss 8 Thumb Rules for Financial Discipline In which we’ll discuss, How much to save? How much to invest? Where to invest?
How big house we can buy? Not to take a huge loan What max EMI should we plan out of our monthly income? How big car we should buy? How much insurance we should take When we’ve thumb rules for all these, then decision-making becomes an easy task This video will be interesting, keep watching Now, before discussing the thumb rules, We must understand 1 – 2 points more Which is mainly, How to maximize Wealth?
Simply, if we understand the power of compounding The most important thing in it is, to increase our capital i.e., to increase our income If our monthly income increases, subsequently our capital increases i.e., our savings will increase and we would be having more amount to invest So the most important thing is, we should invest in our skill set we get maximum return out of it 2nd, Time period is a big factor in the power of compounding that means the earlier we start investing, bigger is our corpus during retirement 3rd, we must choose the right investments so as to increase our returns If we invest in the stock market, then we get returns up to 14-15 % But if we invest that money simply in FD then we’ll just get 5-6 % returns That’s why it’s important to carefully choose the right investment So once the concept of the power of compounding is clear in our mind, and we’ve decided to walk on the path of wealth creation then Financial discipline is very important to continue on that path So that we save every month and wouldn’t spend a lot or take huge loans For all this, thumb rules are necessary So let’s talk about 1st thumb rule 1. How much Emergency Fund to maintain?
Look, unfortunate incidents are bound to happen in one’s life Anyone can lose the job or can undergo decrement in income For such situations, we must keep some Emergency fund and how much Emergency Fund we should keep? Generally, a thumb rule works here That we can keep 6-month salary as an Emergency fund Where should we keep this money? Generally, we should keep this money in liquid form which we can easily convert into cash form i.e., we can store it in our bank account, or FD or Nowadays, liquid mutual funds are available we can store this money in that too 2nd, 50:30:20 Rule According to it, we must save something out of our monthly salary How much we should save?
50 denotes 50 % of our salary can be spent to fulfil needs For eg., we have to pay the rent we have to buy groceries every month Then we’ve to pay utility bills such as internet, telephone, LPG, Electricity then comes the travel cost So we should cover need-related expenses under 50 percent of the salary then we can spend 30% of our monthly salary on our wants i.e., on our desire rather than necessity We wish to buy a nice laptop or wish to go on a nice vacation or wish to buy a good mobile But, budget is a must for everything.
So that we wouldn’t overspend We can allocate 30 % of our monthly salary to it i.e, for our wants But we must save rest 20% of our salary and shouldn’t just deposit into our bank account we should invest it and where should we invest it? There is 3rd thumb rule for it i.e., 100-your age = Equity Investment that means you can do more Equity Investment when you’re 25 years old which means you can invest more in the Share market and Mutual Funds For a 25-year-old person, 100-25=75% that means you can invest 75% of your money in the share market I’m not talking about 75% of monthly income I’m talking about 75% of (20% of monthly income) about which we discussed earlier in the 50:30:20 rule we’re talking about that 20% From that 20%, 75% of your money can be invested in the share market i.e., whatever investment portfolio we wish to create,
75% of that money can go into the share market or mutual funds and rest 25% of the money can be invested in other things such as 5% in gold Rest 20 % can be invested in bonds and debt instrument Similarly, if someone’s age is 50, In this case, 100-50 = 50% i.e., only 50% of the money should be invested in the share market and Mutual Funds So as our age increases, our risk-taking ability and capacity increases So with age, our debt portion or which we call Fixed Income Securities portion In which we get fixed returns for eg., we get fixed returns in FD & Debt Mutual Funds with age, this portion starts increasing So the thumb rule is, 100-your age= % of equity investment 4th, Maximum Loan Eligibility.
How much maximum EMI we should pay? Generally, according to the banks, you can pay 50% of your monthly salary as EMI that means all the loans you’ve taken including personal loans, credit card loans, home loans, car loan total EMI including all these loans should not be greater than 50% of your monthly salary according to the banks But we should go on more conservatively we should pay EMI < 1/3 Monthly Salary So ideally 35% of your monthly salary can be your maximum EMI.
So once you’ve decided how much max EMI you can pay according to that only you can decide how big house you can buy, you could decide how big car you can buy So once you’ve restricted your spending Your Financial Discipline will automatically start building 5th thumb rule is related to car budget How big car we should buy? or How much loan we should take for it One of the thumb rules suggests 6 Months of salary = max car Budget i.e., if someone’s monthly income is 50,000 rupees then he can buy a car worth Rs 3,00,000 3,00,000 Rs will be his car budget Secondly.
If you wanna buy it on loan, then there is another thumb rule for it which we call the 20/4/10 Rule According to it, you can do 20% Down Payment you’ll take the remaining 80% as a loan 4 means, you should take a maximum loan of 4 years and maximum EMI must not be more than 10% of your Monthly Income So once you’ve restricted yourself then you won’t take a huge loan and won’t buy a very big car 6th. Rent Vs Buy Decision When we find a house for ourselves, many times we think, why we should pay heavy rent Better we should buy that house by paying EMI But generally, EMI is a big amount compared to rent So which rule can help here? For this, we’ve made a special Asset Yogi rule 4% Rule According to it.
Whichever house you’re planning to buy or rent, calculate its Rental yield How to calculate Rental yield? Whatever is the annual rent of that property Assume Monthly Rent is 30,000 Rs If we multiply by 12, Annual Rent will be 3,60,000 Rs If we divide it by its property value, Then we get the Rental yield If our Rental yield is > 4% That means, its rental yield is good enough Instead of taking that property on rent, if we’ll buy it, we’ll get good returns When Rental Yield exceeds 4 % then we can think of a buy decision In such a case, we’ll start getting 4% returns from rent only then there will be some appreciation of that property.
Let’s assume 6% as its annual Capital Appreciation then 6%+4%=10%, we get 10% as total returns and if we’re getting 10% returns in Real Estate, then its believed to be good Similarly, if any property’s Rental Yield<4% that means its rental return isn’t so good that means it’s cheaper to rent So in such a case, it’s profitable to buy that property on rent So we can definitely use this 4% rule whenever we’re confused between Buy vs Rent decision 7th. Buying Life Insurance In fact, before planning to invest in any other investment, we should invest in life and health insurance Talking about life insurance, we always prefer the term insurance because it’s Vanilla insurance No investment is mixed into it So you get high coverage for less money In fact, we’ve made detailed videos on the topics covered till now I’ve done a detailed video on Term Insurance and Health Insurance too.
I’ll provide the links in the box below So you can watch that But we’re mainly talking about the thumb rules here So a question arises, How Much Term Insurance Should You Buy? According to the thumb rule, it should be 20* Annual Income should be your term insurance cover If someone’s annual income = 10,00,000 Rs its 20 times equals 2 crores So he should get an insurance cover of 2 crores and mainly he should take term insurance 8th thumb rule is related to health 8.
How Much Health Insurance should you take? First of all, health insurance is a must. Everyone should take it Many people are covered by the corporate If they are working in corporate then they get some health cover but sometimes that cover isn’t sufficient So it’s important for us to get a top-up cover We should get an additional cover in addition to it So how much cover we should get for health insurance There are different rules for it Some say 50% of Annual Income can be your health insurance cover.
But 50% of annual income seems flawed to me Because when you go to a hospital then it’s not dependent on your salary that how much you have to pay Some say 5 lakhs cover is enough, some say 10 lakhs cover is enough But I think hospital expenditure differs from city to city also So there is a good thumb rule, the cost of heart surgery in your city= Health Insurance Cover Assume that someone resides in a tier2 or tier 3 city, and heart surgery is possible there under 3-4 lakhs, then you can get a cover in that range If someone resides in a city like Delhi or Mumbai, where the cost of heart surgery goes up to 7-8 lakhs.
It’s possible that surgery cost would be 3-4 lakhs only But along with it, you’ve to pay hospitalization charges, medicine charges, consultation fees of the doctor we’ve to make our budget according to it So if the cost is 7-8 lakhs in a city like Delhi, Mumbai So a cover of that amount is a must So if you wanna get or compare Term Insurance and Health Insurance I’ll provide the another artical. So these were our 8 important thumb rules that will help you in your day-to-day financial life In fact, we’ve made detailed videos on all these topics you can watch those too You’ll get detailed information on every topic.
If you liked the artical then please share it with your friends and family members I’m sure these thumb rules can help anyone in their lives.
