The 50-30-20 Rule of Monthly Expenses
From reducing your expenses to rethinking your investments, there is always a simple thumb rule at hand which helps you plan well without much complexities
The 50-30-20 rule of spending and saving, popularised by Senator Elizabeth Warren in her book ‘The Ultimate Lifetime Money Plan’, simply asks you to break your in-hand after-taxes income into three parts – 50% of the income goes to Needs, 30% to Wants, and 20% to Savings and Investing.
50% to Needs – Needs are things of basic necessity you can’t live without, like food, water, and clothes.
30% to Wants – Wants are niceties that money can buy but you don’t actually need for basic survival, like hobbies, vacations, entertainment.
20% to Savings and Investments – While needs and wants cater to your well-being in the present, the savings bucket is what will sail you through in the future.
Always remember to first open the tap of your income in the savings-and-investment bucket and fill it first. Then only start with the rest of the two buckets.
Like Warren Buffet too famously said, “Income – Investments = Expenses”, spend what is left after planned investments.
In case of armed forces officers, we generally recommend the rule to be 30-30-40 since salaries / pensions are good and there is no expense related to ‘catering for pension’ and medical expenses involved, which is big drain for a civilian.
Final Takeaway – The pent-up demand and global economic crisis have increased the level of inflation in the economy, which in turn is having a negative impact on our monthly budgets. Therefore, it is important to go for financial budgeting so that the pressure of inflation doesn’t let your investments element down. Remember, your expenses cannot beat inflation, but your savings should be invested in such instruments that give you the power to beat inflation in the long term.
(Contributed by Ayushi Gupta, Associate Financial Planner, Team Arjun, Hum Fauji Initiatives)
How to Beat the Upcoming Rate Hike in Your Home Loan?
Many market experts believe that interest rates will be raised in near future, rather sooner than later, even though RBI has apparently deferred it for now. This is a clear warning for regular investors to tighten their purse strings and take a hard look at their existing loans, especially the home loan which tends to be the biggest loan one takes.
Borrowers with home loans will have to endure the increased interest costs. They must design measures to mitigate the effects. Below are some options a home loan borrower might use to mitigate the impact of an interest rate spike.
1) Increase EMI – To reduce the impact of rising rates, home loan borrowers will need to change their strategy. Instead of raising EMIs, most lenders extend the repayment period by default and that costs you more interest payment overall. The hike in EMI by you saves interest – so try to override the lender’s default option.
2) Switch lenders to get a better rate – Transferring your loan to a different lender with a reduced interest rate can save you money, but it depends on how long later do you plan to pay off your balance. If you’re getting close to your final payback deadline, it might not be worth the trouble and charges paid to switch.
Some lenders may keep rates nominally low in order to attract more customers, but borrowers should keep in mind the additional fees they will pay, such as processing, annual review, and documentation fees levied on you if you switch loans.
3) Pay a portion of the loan amount – Another option for lowering your interest payments is to make a partial prepayment instead of investing in low-yielding savings or investment avenues.
Finally, don’t let the rate hike cloud your judgement while applying for a new home loan or deciding on a balance transfer. Think logically, calculate your final dues on interest and don’t just look at what seems apparent upfront, before you take a decision.
Remember, a home loan is a commitment that will last a long time. Make an informed decision!
(Contributed by Shaheen Akhtar, Associate Financial Planner, HNI Desk, Team Prithvi, Hum Fauji Initiatives)
Managing Economic Debt is Crucial for any economy
Debt plays an integral part of economic progress, which is slowing but remains high across the world. A country’s public debt is considered sustainable if the government is able to meet all its current and future payment obligations without exceptional financial assistance or going into default and ensure it does not jeopardize or hamper growth and stability.
Defaulting due to higher or unmanageable debt can cause borrowing countries to lose market access and suffer higher borrowing costs, which is the current ongoing story of Sri Lanka. In addition to harming growth and investment, it also handicaps policymakers’ ability to increase spending or cut taxes to offset weak economic growth.
How much is sufficient?
Several factors determine how much debt a country can carry before the burden becomes too much. Some of these are the quality of institutions, debt management capacity, and macroeconomic fundamentals.
When the national debt reaches 77% or more of the gross domestic product (GDP), the debt begins to slow the growth down in serious ways. In the long run, public debt that’s too large causes investors to drive up interest rates in return for the increased risk of default that will make the economy drive harder.
To avoid this burden, administrators should carefully find that sweet spot of public debt. It must be large enough to drive economic growth but small enough to keep interest rates low, manageable and payable.
(Contributed by Kritika Saini, Relationship Manager, Team Arjun, Hum Fauji Initiatives)