Transcription
If you take a loan from Financial Express, in this case too, these financial rules that I am telling you have to be treated as thumb rules, and you have to use them by modifying them slightly, keeping in mind your financial situation, your family situation, and your location. It is not that if it is 40 percent here, you have to do exactly 40 percent, you cannot do 42 or 38.
Rule Number One: Car Buying Rule, or as some people call it, 20-4-10, and I have also added a 50 to it. Let's understand what it is. Whenever you are going to buy a car, whether it is new or second-hand, you should definitely apply this financial rule. The first 20 in this says that at least 20 percent of the car's cost should be paid as a down payment. Meaning, if the car is worth ₹10 lakh, then you should pay at least 20 percent, which is ₹2 lakh, as a down payment. Because nowadays, things, including cars, are available on 100 percent EMI, but you should make a 20 percent down payment. This also develops the habit of saving. If you are taking a car on EMI, then take the EMI for your car loan for a maximum of four years. And lastly, the EMI amount, monthly, should not be more than 10 percent of your monthly income.
Now, this is quite a bit of math, but this 50 that is with it makes this math very easy. Here, the 50 says that whatever your annual income is, for example, if you earn ₹1 lakh monthly, then your annual income is ₹12 lakh. And if your wife or children in your family are not working and not earning money, then that is your household income. So, if your annual income is ₹12 lakh, then you can buy a car worth only up to 50 percent of that, which is ₹6 lakh. If your annual income is ₹12 lakh, then buy a car worth only up to ₹6 lakh. If you apply this rule, it will automatically apply. Let me explain with an example. Let's say the person we are taking the example of is named Rishabh. So, Rishabh's salary is ₹1 lakh, and his annual salary comes to ₹12 lakh. So, the maximum car he can buy will be worth ₹6 lakh. If he wants to satisfy this rule, he will pay 20 percent of it as a down payment, meaning he will pay ₹1.2 lakh as a down payment. The remaining amount he has to pay will be ₹4.8 lakh. For this, he will take a loan. Now, if we put this loan amount into a loan calculator for four years, and at the typical car loan interest rate of 9 percent, you will see that the monthly EMI will be around ₹10,900, which is within our 10 percent range, with a slight variation of 1-2 percent.
Rule Number Two: House Buying Rule. See, many financial influencers tell you that you should never buy a house and should live on rent. Well, that's a different matter because a house is often an emotional decision. You want your own house for your family, which you can decorate according to your own wishes. But how much should that house be worth? How much can you afford to buy a house for? This rule tells you that. So, there is no harm in making an emotional decision, but make that emotional decision with financial discipline. This rule ensures that. So, the numbers in this rule are 3, 20, 30, 40. I will tell you what each of these numbers does.
So, the first number, three, says that the house you are looking at should not be more than three times your annual household income. Again, let's take Rishabh's example. Rishabh earns ₹12 lakh annually, which is the annual household income. So, Rishabh cannot buy a house worth more than 12 multiplied by 3, which is ₹36 lakh. We will come back to this number at the end of this rule. The second, 20, says that if you are buying your house on EMI, which you generally will on a home loan or EMI, then its tenure, the loan year, should not be more than 20 years. Which is quite obvious. After that, the 30 number says that the EMI amount should not be more than 30 percent of your monthly income. The less, the better, but it should not be more than 30 percent. Again, from Rishabh's example, if Rishabh goes to buy his house, his monthly salary is ₹1 lakh. So, his EMI should not be more than ₹30,000. He should only take a loan for that much. And lastly, this 40 number says that at least 40 percent of the payment for the house you are making should be from your savings. And only for the remaining 60 percent, you should apply for a loan.
Now, if you put these numbers, for example, according to Rishabh's example, into an EMI calculator, and you try to keep the EMI tenure for 20 years, Rishabh's EMI should be 30 percent of his monthly income, meaning Rishabh should pay ₹30,000 as EMI against the home loan, and pay 40 percent down payment. In this case, Rishabh will be able to buy a house worth around ₹50-55 lakh. If he follows all three rules and ignores this one rule for a moment, then Rishabh can even buy a house worth ₹50-55 lakh. So, this first amount, I think you can keep it a little flexible. It can be from three to five times. If your annual income is ₹12 lakh, then you can look for a house slightly more than ₹36 lakh, around ₹48 lakh or ₹60 lakh. But do not go beyond that, because if you go beyond that, these numbers will change. And I am saying this even when you are getting a home loan at 9-9.5 percent. If you are getting a home loan at 12-13-14 percent, then again, this number will come closer to three. So, depending on the rate at which you get the loan, keep this first number flexible. If you are getting a loan around 9-9.5-10 percent, then this number can increase from three times to four times, even five times. But if you are getting a loan at 14-15-16 percent, then try to keep it around three.
Rule Number Three: The name of this rule is The BUY Rule, and don't search for it on the net, you won't find it because I have just created the acronym. I will tell you its full form first: Term Insurance, Health Insurance, Emergency Fund, Before Investment. This is the complete summary. So, financial emergencies happen in our lives when we are unable to work. So, we categorize these emergencies into situations where we will not be able to work. So, what would be the biggest emergency? You will say, getting burnt. No, no, the biggest emergency would be if we are no longer in this world. Then, of course, we will not be able to work. So, since that is the biggest emergency for us, as soon as you start earning, first ensure that you procure this first T, Term Insurance, for yourself. How much should the amount of term insurance be? It should be at least 10 to 15 times your annual income. Meaning, if we take Rishabh's example, whose annual income is ₹12 lakh, then the term insurance we should take should be in the range of at least ₹1.2 crore to ₹1.8 crore. If Rishabh has taken any kind of loan above this, for example, if he has taken a home loan of ₹50 or ₹60 lakh, then in that case, his term insurance should also cover the liabilities. In fact, in most cases, whenever you go to take a loan of a large amount, like a home loan, that bank or NBFC will also compel you to take an additional insurance, which will be for the same amount as the loan you have taken.
So, the first thing you should do as soon as your income starts is to sort out term insurance. The sooner you get term insurance, the lower its premium will be. Otherwise, as you get older, with age, the premium for your term insurance of ₹1 crore will keep increasing. So, if you haven't taken any term insurance yet, please take it. Or if your income has increased and your current term insurance cover is not adequate, you can also take an additional term insurance. For this, I would recommend Policy Bazaar. Mandeep, my family, and all of us have bought our term insurance from Policy Bazaar. Policy Bazaar's team compares all insurance plans and also supports you during settlement. I am giving you the links to the best term and health insurance in the description. If you use the links provided in the description to choose a term insurance or health insurance for yourself, you will get a special discount which is only for LLA subscribers. Plus, you will also be able to support our work.
After term insurance, our next emergency is, let's say we are alive, but some accident happens, or some issue with the heart, or some condition due to which you are unable to work for a few months, and you are hospitalized. In that case, who will pay the hospital bill when you are unable to work and your income has stopped? So, in such a case, health insurance comes into play. So, you should definitely get good health insurance because it is said that most people in India are just one illness, one hospitalization away from going below the poverty line. So, to avoid such a situation, get good health insurance. And after sorting out both of these, build your emergency fund. Because as soon as people get money, they directly put it into stocks, mutual funds, start doing futures and options. No, before that, please build an emergency fund that should be up to six months. Meaning, if you lose your job or fall ill, in any situation, let's say you fall ill, your hospital bill is covered by health insurance, but what will your family eat? What will you eat? How will all other expenses be met? So, if you have an emergency fund for six months, then you are more or less safe, there is no problem with that. So, in a nutshell, first term insurance, then health insurance, then emergency fund, and only after that should you plan for the fourth situation, meaning retirement planning, when you become very old and cannot work, or so on. You have to retire, whatever works for you. After that, start your investment for it.
Fourth comes the Rule of 72. I also call this the double your money rule because you invested ₹1, and after how much time will it become ₹2? Everyone is very eager to know this. It's a very simple rule. It says that divide 72 by your annual rate of return. Let me explain with an example. Suppose you are getting an 8 percent return. Suppose you have booked an FD and you are getting 8 percent interest on it. So, after how much time will the ₹1 lakh you invested in that FD become ₹2 lakh? It will become 72 / 8, meaning after 9 years. Of course, I am ignoring TDS etc. here. Whereas, suppose you are getting a return of 12 percent, then the time to double will reduce to just 6 years, because 72 / 12 is 6 years. Whereas our stock market grows at about 15 percent. So, at 15 percent, the amount will take approximately slightly less than 5 years to double. So, with this Rule of 72, you can find out how to double your money.
Fifth is Asset Allocation Thumb Rule. Again, this is a thumb rule. You should use it only as a guiding principle, do not get stuck in it exactly. So, this rule says that whatever your age is, 100 minus that age, keep that much of your portfolio in equities, and the remaining percentage, keep it in safer assets, like debt, government bonds, or fixed deposits, where you can allocate that part. For example, if you are 25 years old, then 100 - 25, meaning you can keep 75 percent of your portfolio in equities. Whereas if you are my age, 35 years, I am 34, let's say 35 years, then you should keep 100 - 35, meaning 65 percent of your portfolio in equities. The remaining should be in debt or safer investments. Again, treat it as a guiding principle. You should definitely modify it according to your situation, your liabilities, and your risk appetite.
Before going to the sixth rule, I am giving you two bonus rules. The first bonus rule is the Total EMI Rule. This means that more than 36 percent of your monthly income should not go towards your EMIs. You will say, I told you two rules earlier. First, I told you a car buying rule, and a house buying rule. In one, I said it should not be more than 10 percent, and in another, I said it should not be more than 30 percent. So, how did the number 36 come here? This rule says that if the total of all your running EMIs, it could be your home loan, your car loan, any small personal loan, if you are paying more than 36 percent of your monthly income in total, then you are financially stressed.
And the second bonus rule is the Credit Card Rule. This rule has two parts. The first part, 30, says that whatever your credit limit is, for example, if your credit limit on a card is ₹1 lakh, then use a maximum of 30 percent of it, so that there is no difficulty in your CIBIL score. And the second, 100, says that pay the entire monthly outstanding amount in full. Do not roll it over or make partial payments, because the interest rates charged on credit cards are very high. That is why credit card companies give you many rewards, so that perhaps in a month when you forget to make the payment, or when you don't have enough money, they can recover it from you in full.
Last but not the least, the Budgeting Rule 50-30-20. This says that 50 percent of your expenses can be towards your needs. Needs, like your house rent, your children's school fees, your food expenses, medicines, fuel. All these are your needs. Spend 50 percent on these. Meaning, Rishabh, who earns ₹1 lakh, his total expenses should generally be within ₹50,000. He can spend 30 percent on his wants, like going out for a trip, eating out, or even some higher education, spending on learning. You should spend up to 30 percent on that. And at least 20 percent you should save. So, this 30 percent is for our wants, and this 20 percent is for our savings. Now, modify this slightly depending on your age. For example, if you are a bit young, and you don't have that many needs yet, you can live in a small house because you are a bachelor, you live in a shared room, your rent is ₹10,000. So, in that case, perhaps this number for needs might be 20 percent, 25 percent, 30 percent initially. The remaining should go towards your savings, so that as you get older, when your responsibilities increase, your family grows, you have children, then for that time, you already have a heads-up, and you have a good corpus to handle that situation.
Keep writing in the comments below how many of these six rules you are already following in your life. Two out of six, three out of six, four out of six. Write that below. Also, if there is any financial rule that you follow and the public should know about, then also mention it in the comments. And if you haven't chosen a good term insurance for yourself yet, a good health insurance, then I am giving you the links to the best term insurance and best health insurance in the description below. Through that link, you will also get a special discount, plus you will be able to support our work without paying any extra money. As you leave, if you liked the video, then like it and write in the comments, "It was fun."