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ET Wealth Wisdom Ep 51 (ET Online)

A thumb rule to set your personal finances in the right direction

04:08 Min | January 03, 2020, 2:09 PM IST
In this week's ET Wealth Wisdom podcast, we tell you about a thumb rule that can help you manage your household budget wisely.
Hosts: Shambhavi Mehrotra, Tania Jaleel

Producer: Paramveer Singh

Happy New Year Tania Jaleel. How was new years?

You know the usual, sat by the bonfire and reminisced about the year gone by and danced to 90s songs

You are big on resolutions right? What have you promised yourself you will do in 2020?

Well… I have decided that this year I will be more prudent when it comes to money.. budgeting is what I will start doing

That is a mature resolution for one so young!

That is a good idea for a podcast no? A good way to start the new year too

HI everyone, I am TJ and I am SM.

And if you like Shambhavi over here have made a resolution to be wiser with your personal finances, this week's ET Wealth Wisdom podcast will tell you about a rule that can help you manage your household budget wisely.

Household budgeting is one of key challenges faced by the average Indian family

Budgeting is always a challenging task with a three way pull between necessities, luxuries or wants and investing for financial security.

Necessities would include expenses that are unavoidable for a certain standard of living like home loan EMIs, school fees, grocery, medical insurance premiums and so on.

Spending on luxuries could include optional expenses such as eating out at a newly opened fine dining restaurant and buying the latest gadgets.

So, the big question is what portion of the income should be spent on each of these categories?

Luckily, even this question has a thumb rule that can act as a guiding principle.

This thumb rule was popularised by American senator and democratic presidential candidate Elizabeth Warren. She talked about the 50/20/30 budget rule (sometimes labelled '50-30-20') in her book, All Your Worth: The Ultimate Lifetime Money Plan.

The thumb rule is to divide up after-tax income and allocate it to: spending 50 percent on needs; 30 percent on luxuries and wants; and 20 percent to savings and financial goals.

It may look rather simple but can be quite a challenging one.

To begin with, how do you distinguish between necessities and luxuries or wants? There cannot be a uniform definition for necessities.

Depending on income levels and surrounding environment, what could be classified as a necessity for one can easily be a luxury for someone else.

For overall financial wellness, the 50/30/20 is a broad guideline and will need to be supplemented by a good financial plan customised to the income levels and goals of an individual investor.

So, consult a good advisor.

The percentage of regular income that should be set aside for long-term investments can be debated, however what remains a universal truth is the fact that the path to achieving financial wellness starts by inverting the equation of 'Income minus expenses = savings' to 'Income minus savings = expenses'.

From the perspective of long-term financial well-being, sticking to a financial plan is important.

But it is equally important to spend a decent amount of time and money with our near and dear ones to create memories for a lifetime.

As we strive to find a balance between spending to create memories and savings for a secure tomorrow, do also remember to take care of your health.

Goes without saying that a good savings and investment corpus is best enjoyed when you are in the pink of health.

Yes, this is a thumb rule. But remember thumb rules are just that, thumb rules. It just helps you with a starting point.

So, use this thumb rule to set your personal finances in the right direction

Hopefully this podcast will do just that… set you off in the right direction.

And on that note, that will be all from us for this week and happy new year

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