Budgeting
What is the 50/20/30 budget
rule?
The basic rule is to divide after-tax
income, spending 50% on needs and 30% on wants while allocating 20% to savings.
Example: salary after tax deduction is 100000, you spend
50000 on needs, 30000 on wants and 20000 on savings.
Needs
Needs are those bills that you absolutely must pay and are
the things necessary for survival. These include rent or mortgage payments, car payments, groceries, insurance, health
care, minimum debt payment and utilities.
If you live in low cost area or you have high salary, 50 %
towards housing and bills might be a lot. You can put money left out of this
50% to wants or savings.
Wants
Wants includes upgrade decisions such as dinner and movies
out, vacations, the latest electronics gadget.
Savings
Savings includes adding money to an emergency fund in a
bank savings account, mutual fund account and investing in the stock market.
Savings can also include debt repayment. While minimum payments are part of the "needs" category, any extra
payments reduce principle and future interest owed, so they are savings.
Top 10 investment options
Returns
from PPF, Bank fixed deposit
(FD), RBI Taxable Bonds, Senior Citizens' Saving Scheme (SCSS) are not
market linked. While returns from Direct equity, Equity mutual funds, Debt mutual
funds, National Pension System (NPS), Real Estate, Gold are market linked. Except PPF returns on all other
options are taxed.
Market-linked
investments generate high return, other investments generate moderate returns.
For long-term goals, investor has to make the best use of both worlds. Have a
judicious mix of investments keeping risk, taxation and time horizon in mind.
|
Investment option |
Risk |
Tenure |
|
Direct equity |
High |
Can be sold anytime |
|
Equity mutual funds |
Moderate High |
Open end |
|
Debt mutual funds |
Low |
Open end |
|
National Pension System (NPS) |
low |
60 minus entry age |
|
Public Provident Fund (PPF) |
no risk |
15 years |
|
Bank fixed deposit (FD) |
low |
7 days to 10 years |
|
Senior Citizens' Saving Scheme
(SCSS) |
no risk |
5 years |
|
RBI Taxable Bonds |
no risk |
7 years |
|
Real Estate |
high |
Can be sold anytime |
|
Gold |
low moderate |
Can be sold anytime |
Building a Complete Financial
Portfolio
Complete
Financial Portfolio has fully funded retirement accounts, are debt-free, have a
six-month emergency cash reserve, diversified investments.
Build a Six-Month Emergency
Reserve
The
emergency cash reserve should be sufficient to cover up to six months of the
following: Mortgage payments, Insurance costs, Utility bills, Groceries, Fixed
payments (car payments, student loan payments, etc.), Minimum payment on credit
cards.
The
primary investment objective for your emergency cash reserve is safety, not
return. The simplest option is to park the funds into savings or a money market account. If you
are interested in generating extra income, consider building a laddered
certificate of deposit portfolio.
You can go
to your local bank and open six fixed deposits with maturity as
1,2,3,4,5,6 months. As each fixed deposit matures, roll it over into a new
six-month. In short order, you will own six separate six-month FD's, one of
which will mature every month.
Retirement Fund
How much money do I
need to retire? Retirement corpus = Annual income requirement/investment yield.
Calculate your monthly expenses, and multiply by 12.
Example, annually
expenses are 10.5 Lakh. Investment yield @7%, retirement corpus will be 1.5
Crore. If the person is going to retire after 20 years, value of 1.5 crore
after 20 years at 6% inflation will be 4.85 crore.
Diversify your investment
portfolio
Traditional wisdom says don’t put all your eggs in one basket. It
restricts the damage to your financial well-being in case one asset class or
instrument goes for a tailspin.
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