MAGIC RATIO OF 5:3:2
I call it magic ratio, as It is a simple ratio for a family of a single income person to know where he actually stands on a month on month basis.
As it is a constant reminder of you either being on track with your financial plan or off it and keep reminding you of the gap you need to bridge to be on the comfort side of it.
Out of total income of Rs. 100/-, if you are paying Rs. 50 or less towards debt/liabilities/loans, Rs. 30 or less is spent towards your livelihood/ lifestyle expenses and Rs. 20 or more you are able to save for your future needs you have nailed it and are on a right track. The same would vary depending upon the size of your family and your age etc. but broadly it would help you understand where you stand it terms of a balance between your liabilities, spending and savings.
INSURE what is of value
There has to be adequate Term insurance cover for the person, who is running the expenses of the family. What is also important is to have disability and accident cover for him, as his absence and disability to work both will have huge impact of the financial position of the family. You must take into account all loans and liabilities along with the future financial needs of the family while deriving the life cover needed for him/her. What is also required is to have only specific life term cover and not mix it with any Unit link plan or saving plan, as the objective is to take the desired cover for maximum term at least cost.
Minimize Debt/credit card over exposure.
Taking loans to pay of the loans or getting comfortable with minimum payment schedule of credit card are tarp you should avoid. Try and minimize your debt and clear as much as you can as soon as possible to be out of the debt cycle.
Emergency fund or contingency fund has to be created for a family of single income. The fund must have at least a balance of 3-6 month of current monthly income depending upon the age and liabilities on an individual. This would be a breather in times of emergency or income loss in business or loss of job. This fund should be kept is a liquid instrument, which can be accesses easily in times of need.
Invest what you save
Out of Rs. 20 what you save; every rupee should be wisely invested, towards your life goals. As, all the goals from your retirement to kids’ education, are of equal importance; allocate investments based on the time horizon to make sure you achieve maximum return over the long term. Make your savings work and generate income for long run, do not let them sit idle in your saving account.
Save right, invest Wise.