Financial Planning Part-3 | 8 Thumb rules for tension less Financial Planning | A Beginners guide

In this video on Financial Planning, you will get to know about the following:

Hello friends welcome back to kkr wealth channel let’s continue our discussion on basics of financial planning in this video we will talk about our income distribution which is based on needs and wants first two videos gives basics on needs and wants also talks about basic groundwork to be undertaken by anyone before starting their investment journey in case

You are watching this video directly without watching the first two videos i strongly suggest you to watch those two videos for complete understanding on basics i will keep those two videos in end card for you to watch in this video we will talk about 8 thumb rules that help us to quickly do basic financial planning rule 1 50 30 20 rule senator elizabeth warren

Popularized the so-called 50 30 20 budget rule in her book all your worth the ultimate lifetime money plan the basic rule is to divide the after tax income or you can say take home salary and allocate it to spend 50 percentage on needs like rent medical etc including essential loans like home or education loan 30 percent is on wants like dining out parties etc

Including non-essential loans like personal or jewelry loans here car loan can be a need are a warned depending on person to person requirement remaining 20 to savings or investments these are for attaining your goals including emergency fund to understand detailed explanation on difference between needs and wants please check the second video where this is stocked

As part of building emergency fund you might be wondering whether this rule will be applicable or not for all ace groups here i will slightly change this rule based on professional experience during the early stages of professional life take home salary would be less also there will be lot many things that everyone would like to do during those early stages but

Yes our professional experience increases the take-home salary would also increase with this assumption i have modified the division of needs wants savings based on professional expertise level for beginners you can keep 50 40 10 that is 50 percentage needs 40 percentage wants 10 percent is investments next year you may become advanced beginners so try to keep it

As 50 percentage needs 30 percentage wants 20 percent is investment with increase in income try to increase the proportion towards investment once you reach competent level in your career you can maintain 45 25 30. next would be proficient level in this you should be able to achieve the take-home salary division of 45 15 40. finally once you achieve expect level

You should be able to maintain 40 10 50 and try to be improved on savings proportion with each year in case you are not able to improve further then try to maintain this 40 10 50 proportion at the least rule 2 100 minus is the 100 minus a is rule is one such rule designed to determine the asset allocation between equity and debt according to this rule you need to

Subtract your a’s from the number 100 the resultant is the percentage of equity exposure that can suit you the balance can be invested in debt this thumb rule works under the assumption that an individual’s equity allocation reduces with aids as in general person’s capability to take on high volatility reduces with is especially by that time they reach retirement

Where people wants to have a peaceful life and depth instruments issue fixed income this table gives you the proportion of allocation towards equity and debt for different ages to explain better let’s call our friend rom whose age is 35 years and plan to start investing using the 100 minus a is rule the asset allocation of ram’s portfolio will look like equity

Is 100 minus 35 that is 65 percentage and remaining 35 percentage in depth funds however this is just a thumb rule and the equity allocation generally depends on risk taking capability rule 3 rule of 72 the rule of 72 helps to estimate when the money will get doubled it is simply obtained by dividing 72 with rate of return let’s have a look into the table for

Data on rate of return versus years to double from one percentage to 20 percentage yearly returns suppose if you are getting seven percentage interest rate or returns rate then it will take 72 by 7 that is 10.2 years to double doing reverse that is dividing 72 with the number of years will give you the interest rate required to make your money double for example

If you want to double the money in 5 years then 72 by 5 that is 14.4 percentage returns rate is required you need to invest in such sort of instruments accordingly let’s call sham seems he came with a doubt let’s look into his quotient it seems his investments are giving 12 percentage annual returns and wanted to know when his money will get doubled i hope you got

The answer it takes 6 years to double sham’s investments rule 4 rule of 114 the rule of 114 helps to estimate when the money will get tripled or three times it is simply obtained by dividing 114 with rate of return have you look into the table for data on rate of return versus years to triple from one percentage to 20 percentage yearly returns suppose if you are

Getting 7 percentage interest rate or returns rate then it will take 114 by 7 that is 16.3 years to triple oh it’s sam again now he came with an another doubt let’s look into this question as well his investments are giving 12 percentage annual returns and now he wanted to know when his money will be tripled as you have guessed it correctly it takes 9.4 years to

Triple sham’s investments rule 5 rule of 70. you know it or not but inflation is the biggest enemy which eats away our wealth we can call it as the silent killer as we generally consider cash in absolute value but not in relative value due to inflation the value of money decreases over time the rule of 70 helps us to estimate the impact of inflation on our wealth

In other words this rule determines the value of your current wealth a few years down the line this is done by dividing 70 with expected long term inflation rate the resulting number gives the number of years by when the wealth will be off of the what it is today in general long-term inflation in india is around 6 percent is so if we divide 70 with 6 then we get

11.6 that means it takes around 11 and of years to off the wealth if not at all invested in any instrument this picture shows value of 1 lakh rupees in the year 1984 decreases to 5100 rupees by the year 2021 this is as per actual inflation data here it is not that one lakh rupees got reduced its absolute value is still 1 lakh but its relative value is 5100 rupees

Only in other way you can also take this in this way items were 5100 rupees in 1984 are costing 1 lakh rupees in 2021 rule six forty percent is emis this thumb rule says that all your emis combined should ideally be no more than 40 percentage of your take-home salary in general home car and personal loans are being taken by people ideally emis for each of these

Should be like not more than 35 percentage of take-home salary for home loan not more than 10 percentage of take-home salary for car loan and not more than 10 percentage take-home salary for personal loan also combine emi of all loans should be less than 40 percentage of total take-home salary you might get doubt what should be my ideal purchase value of home or

Car in case of home the value of house should be two to three times of families annual income in case of core its value should be less than 50 percentage of annual income of the owner for example our friend rome is considering taking loan to buy a house and a car he is getting 50 000 rupees as monthly take-home salary then home loan emi should not be greater

Than 15 000 rupees per month that is 30 percentage of take-home salary and car loan emi should not be greater than 5000 per month that is 10 percentage of take-home salary so that the total emi is less than 40 percentage of rams take-home salary rule 7 4 percentage withdrawal rule this is more of your financial discipline rule than an investing rule most people

Try to save for their retirement years and create a corpus that outlasts them with inflation rates being unpredictable there is a risk of burning through the corpus before time the four percentage withdrawal rule is designed for retirees to ensure a steady income stream without spending their savings at a past phase if you have not started savings or investment

Towards retirement then i strongly suggest to immediately start savings or investment towards retirement now sham’s father is asking doubt it seems he has a retirement corpus of one crore rupees then to manage his living expenses shop’s father must withdraw not more than 4 lakhs per year rule 8. 10 5 3 rule while making any investment decision we need to check and

Understand expected rate of return and the 1053 thumb rule is often cited while doing most long-term investing calculations the rule is quite simple and according to this rule we should expect 10 percentage annual returns in equities 5 percentage annualized returns from debt instruments three percent is yearly returns from savings instruments i need to tell you

One thing about this rule this rule holds good for u.s citizens then can this be applicable to indians as well just like other general rules the fact is indian economy is growing at some other different pace and even inflation numbers are different so this rule needs to be modified slightly i would modify it as 185 there is a reason behind this india’s average

Gdp growth rate is six to seven percent days and inflation is around five to six percent is so returns of at least 12 percentage annualized returns should be expected from investing in equities eight percentage annual returns in-depth instruments and five percent is yearly returns from savings instruments let’s combine rule of 72 with this rule to understand when

Our money will get doubled equities with 12 percentage returns doubles invested amount in six years debt with 8 percent is returns doubles invested amount in nine years and saving instruments with 5 percentage returns doubles in 14.4 years this shows clear difference on which type of instruments double money in how many years a combination of some are all these

Rules will help us to manage our money properly so how this can be done let me explain this with an example let’s check with our friend ram who is 30 years old he is getting 50 000 rupees per month as take home salary he is good at his savings and able to do our first rule with 40 percentage needs 10 percent is wars and 50 percentage investments or savings that

Means 25 000 per month towards investment having financial knowledge he is ready with the emergency fund took health and medical insurance seems he might have watched our first two videos on financial planning if you have not washed them till now i suggest you to watch them now with 100 minus a’s rule he can do investment that is 100 minus 30 that is 70 percentage

That means 18 750 rupees towards equity and remaining 30 percent is that is 6250 rupees towards depth with 12 8 5 rule is equity investments doubles in 6 years while his deputy investments doubles in nine years while these broad rules can help you take the right step towards investment journey but no one site fits all before investing your money it is essential to

Understand why you are investing investing means taking risk and generally the riskier the investment the greater the potential reward however you will also need to accept that the investment journey may not be a smooth ride and hence you will need to stick to your guns and stay patient regardless of market volatility to ensure long-term results adequate planning

Reaps healthy investment benefits when one is checking out the options to invest money they should first gain clarity about what they are investing for be it the how slow needs or to meet the future expenses once clear with the investment objectives one can make better choices among just other crucial factors like target return time horizon and risk appetite

Considering all the factors select the asset class best suits the aims and objectives an excellent way to ensure that you are making the right investments is to speak to your financial advisor or planner on your long-term plans the right financial advisor can help you determine how much you need to invest and how much you can comfortably withdraw during your

Retirement years in case of any need on financial planning especially on mutual funds you can contact me using mail id shown on the screen kkr wealth gmail.com finally re-look and redo this exercise once in two or three years and adjust the fund’s allocation accordingly let’s meet again in the next video jahin

Transcribed from video
Financial Planning Part-3 | 8 Thumb rules for tension less Financial Planning 💸 | A Beginner's guide By KKR wealth