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Do Not Fall Into A Debt Trap

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Do Not Fall Into A Debt Trap
Deepika Asthana - 02 April 2020

Numbers can often confound us and leave us flustered. When it comes to managing money and dealing with our investments we often leave it to the professionals. While it is wise to seek professional advice, it is also important to be informed about our finances. Here are some numbers and ratios that individuals should be conversant with if they are to manage their finances judiciously.

Save at least 10 per cent of your income every month

The rule is to pay yourself first and then to pay your bills. Paying yourself first simply means that you first save money and then you spend money. The standard rule is that you should save at least 10 per cent of your monthly income for your short-term and long-term goals in addition to the money that you set aside for your retirement plan. You need to put aside this 10% before you pay for your discretionary and non-discretionary expenses.

Create an emergency fund that can cover at least 6 months of your expenses

Life is uncertain. Every now and then certain, exigencies come up, which can derail our plans and can have an adverse impact on our finances. You can create an emergency fund to tide you over such exigencies. On an average, you must keep aside at least 6 months of expenses in a liquid fund. For example, if your monthly expenses are Rs 25,000, then you need to keep aside at least Rs 1,50,000 as an emergency fund.

Debt should not exceed 35 per cent of your monthly income

The best situation would be if you had no debts. However, we have all needed to avail of debt at some point in time or another to fund some of our consumption needs. While it is fine to take on debt, you must ensure that you do not fall into a debt trap. The best way to do this is to limit your debt exposure to a maximum of 35 per cent of your gross monthly salary.

Retirement savings should be a priority

For most individuals who have just started earning, retirement seems like a long way off. However, to maintain your lifestyle in your retirement years and not be dependent on anyone, you need to start saving for it right away. But how much should you save? The general rule of thumb is that you should create a retirement corpus worth thirty times your annual expenses. So, if your monthly expenses are Rs 25,000 then your annual expenses would be Rs 3,00,000. Accordingly, your retirement corpus should be Rs 90,00,000.

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