Recipes seem to exist for everything in the world. There are recipes for cooking where every ingredient is important. There are recipes for a good trip, a fun holiday and much more.
But there are also ready-made recipes for how to manage money wisely and rationally.
Budget Planning Rule: 20-30-50
The budget planning rule is as follows:
- 20% of income must be set aside for your long-term goals (for example, retirement) or be spent on debt repayment.
- 30% is the maximum amount you should spend on housing.
- 50% of the income can be spent on everything else.
It is important to note that the procedure for distributing the amount of expenses for various needs should be exactly as described above: first we save or pay off the debt and only then we spend on everything else.
This rule helps to lead a healthy financial life and achieve your financial goals, and in addition, save.
If you manage to save 20% of your income, then you are already much more prosperous than many people and closer to your goal, since most not only do not have the opportunity to save, but often do not even think about it.
30% – this is the amount that you can allocate for housing, whether it is rental or mortgage. If you adhere to this particular ratio, then this will be the optimal solution, allowing you to slightly limit yourself to other expenses.
If you can spend 31% on housing, then you should understand that you get this 1% due to something else. You deduct it from either 20% of the savings or 50% of other expenses.
Monthly expenses multiplied by 6 is your reserve fund
Do you have a contingency fund? Experts say that such a fund should be six times the amount of your monthly expenses.
Some believe that it is necessary to create a fund, the amount of which will be equal to the sum of expenses for 12 months, someone says three months.
In any case, all experts in the field of financial planning indicate that such a fund is necessary.
The fact is that we never know what can happen to us. It happens that people temporarily lose their ability to work, they are fired from work, health problems arise that require serious financial investments.
For any of these cases, you must have a supply of money that allows you to safely survive a difficult period of life.
Mortgage Size – Your Income Multiplied by 2.5
This is another formula for a favorable financial situation, which will allow you to pay 30% of your income for a mortgage. It is important to understand that the amount that you receive per year is taken as the level of income.
That is, if the annual income is multiplied by 2.5, this will be the optimal amount that you can take on a mortgage.
120 minus your age – investment formula
When you create an investment portfolio, asset allocation can be difficult. This is a really difficult question, and often delaying it until better times can cost you money.
But, fortunately, the experts have developed the ideal formula so that you can optimally place your assets.
So, the percentage of funds invested in stocks is calculated as 120 minus your age. If you are 40 years old, then 80% of the investment must be invested in stocks and 20% in bonds. As your age increases, you will invest more in bonds and less in stocks.
This is a fairly simple formula, but it eliminates the unnecessary pangs of choice.
Income times 25 is the formula for saving on retirement
How much money do you plan to save for retirement? A number of experts believe that it is necessary to set aside 4% of income to save on retirement. If you save only 4% per year, then it is highly likely that your savings will last for the rest of your life in retirement.
This is a fairly conservative approach, because your income is likely to be much more than your expenses, but no one can predict what your pension costs will be.
Age Multiplied by Income / 10 – Ideal Capital Formula
This formula was primarily for Americans, so for our country it is not always applicable. Nevertheless, experts note that it has its advantages.
First of all, it’s not about comparing your fortune with the capital of colleagues or friends and boasting.
It is about tracking your own progress and planning a long-term financial situation.
Your annual salary multiplied by 10 is the amount of life insurance
Sometimes it’s quite difficult to determine how much to insure your life. However, many people think about life insurance, as situations in life are very different.
If you have a family and children, then this is a good reason to think about how to insure your life.