1. The rule of budget planning: 20-30-50.
The rule of budget planning reads as follows:
• 20% of income should be laid up for own long-term goals (for example retirement) or should be referred for debt repayment.
• 30% - a maximum amount which you should spend on housing.
• 50% of income may be spent on all the rest.
It is important to note that the order of distribution of expense amount on various needs shall be like that, as indicated above: firstly we save money and pay off debts and only then spend money on everything else. This rule helps to lead a healthy financial life and achieve your financial goals, and in addition to it, to economize.
If you manage to economize 20% of your income, then you are a lot more well-situated and closer to your goal, because the majority not only have no possibility to save money, but often even do not have this in mind.
30% - this is the amount, which you may put forward on housing, should it be lease or mortgage. If you follow this proportion, then this will be optimal solution allowing not limiting yourself a lot in other expenses. If you can spend 31% on housing, then you have to understand, that this 1% you obtain at the expense of something else. You deduct it either from 20% meant for saving or form 50 % meant for other expenses.
2. Monthly expenses, multiplied by 6 – this is your emergency reserve fund.
Do you have a fund in case of unforeseen expenses? Experts say that such a fund shall constitute a six-fold amount of your monthly expenses.
Some believe that it is necessary to create a fund, the amount of which will be equal to the amount of expenses for 12 months, someone says, for three months.
In any case, all experts in the field of financial planning indicate that such a fund is needed.
The thing is, we never know what might happen to us. It happens that people temporarily lose their ability to work, they may be dismissed from their jobs, and health problems arise which require serious financial investments.
In any of these cases, it is necessary to have a reserve of money that allows you to live smoothly through a difficult period of life.
3. An amount of mortgage – your income multiplied by 2.5.
This is another formula for a good financial situation that will allow you to pay 30% of your income for your mortgage.
It is important to understand that a level of income is considered on the basis of the amount of money you get annually.
That is, if to multiply an annual income by 2.5 – that will be an optimal amount which you can take when obtaining a mortgage.
4. 120 minus your age — a formula investing.
When you compose an investment portfolio, asset allocation might be problematic.
This is indeed a difficult question, and often its postponement to the best of times can cost you money.
But fortunately, experts have developed the perfect formula for you to optimally allocate your assets.
So, for example, percentage of funds invested in shares is calculated as 120 minus your age. If you are 40 years old, then 80% of investments should be invested in shares and 20% in bonds.
As your age increases, you will invest more and more in bonds and less in shares.
It's a pretty simple formula, but it gets rid of unnecessary agonies of choice.
5. An income multiplied by 25 is the formula of saving for retirement.
How much money do you plan to save for retirement? A number of experts believe that it is necessary to postpone 4% of income to save for retirement.
If you save only 4% per year, there is a high probability that your savings will last for the rest of your life in retirement.
This is a pretty conservative approach because your income is likely to be much larger than your expenses, but no one can predict what kind of expenses you will have in retirement.
6. Age multiplied by income/10 — the formula of a perfect equity.
This formula was primarily for Americans, so it is not always applicable to our country.
Nevertheless, experts note that it has its advantages.
First of all, it is not a question of comparing your life's savings with colleagues’ or friends’ equities and of bragging.
The idea is to monitor your own progress and to plan a long-term financial situation.
7. Your annual salary multiplied by 10 is the amount of life insurance.
Sometimes it is quite difficult to determine in how much amount to insure your life.
However, many people think about life insurance, as there may be very different situations in life. If you have a family and children, then this is a good reason to think about how to insure your life.
