How much should one save up? - Personal Finance

Financial planners get asked a number of common questions all the time from their clients. These questions based on personal finance are important for the clients, of course. However, some of these are asked repeatedly again and again.

Here are some of those:

How much should one save up?

This depends on your age and saving goals. As you know, the sooner you start with a savings or retirement plan, the more you’ll save up by the time you do retire, and the less you’ll have to pay. You can save up the same amount even if you start later, but then you’ll have to give more in monthly EMIs. If you are in your 20s, you should at least save 10% to 15% of your pre-tax income. If you start later, such as in your 30s, you’ll need to start saving around 20% of your income, and possibly more.

Which investments should one choose for retirement accounts?

Most people have a mix of stocks and bonds. When you are young, you tend to gravitate more towards stocks. However, as you age, you introduce an increasing amount of bonds in your portfolio for more stability. If your employer gives you a Provident Fund account and matches a part of your contribution, there can also be an option for a wide range of investment options which are diversified and have low costs. For the average investor though, target-date funds can be a good option. These are diversified enough and have a healthy ratio of stocks and bonds that adjust automatically over the years according to your date of retirement.

When is it OK to buy anything through debt?

Falling into debt with a credit card is always a bad idea. It is actually the worst way to fall into a debt spiral, and the most expensive way to get a loan. According to the latest data, credit card loan interest rate averages 18%. That’ll take a chunk out of your monthly income! This will impact your credit score, believe that. And if you default on that loan? God help you! The best way to use a credit card is only for emergency purposes, and that too when you do have the money to pay back before the interest period begins.

Auto loan is an equally bad idea. However, the situation is better if the auto loan is with very low or Zero interest. In this case, the situation is not so bad, but any other situation will not be so good. Only buy those cars that you can pay for with cash. Otherwise, you’ll be paying a back-breaking interest for years.

Student loans can be a bad idea at times. These normally come with high interest and bankruptcy can’t save you from it. While these interest rates are not as high as personal loans and credit card loans, they are higher than mortgages.

Mortgage debt is unavoidable, but is valid if the reason is good. It can’t be avoided if you are looking for your first home. However, try to seek a home loan with a low interest rate. You can do this by paying a big chunk of funds as a down payment. Mortgage debt should not be more than 28% of your monthly gross income.

Educate yourself as much as you can on financial matters. Think about hiring a financial advisor too if you really need professional help.

How To Save Up And Follow Your Dreams

Sometimes, you need to take a big leap of faith and a whole lot of risk if you want to improve your life. This includes going back to school, starting a business, quitting your job, changing career, and so much more. It’s all about how you handle your money.

There are two things which make a big difference at times like these: your ongoing expenses, and how much emergency cash you have got. It helps to reduce your debt and to pay them off as much as you can, while at the same time creating a stash of money for the time you’ll be taking that leap of faith. These steps surprisingly make your life easier later on.

Typically, experts recommend that you have an emergency fund which can help you through 3 months of expenses. If you are a single earner, you should have 6 months cash. If you are making a change that includes pay cuts or zero pay for some time, you should save for a longer period of time.

So here is what you can do: find out for how long the pay cut shall last. Will it be for a year or for two? Save according to that.

When you project and plan for future income and expenses, it shall help you to make the leap easily when the time comes. For instance, if you want to go back to school again to complete your education, determine what kind of new job you want after the course is done, what are its prospects and how much more or less you’ll earn than what you are making now. In the end, be realistic. If the education is not for furthering your career, you still need to figure out how to keep paying your bills and expenses in the meantime.

Use your benefits before you quit

It may not be smooth sailing all the way. Things may come up for which you had not planned. You need to foresee these things, or at least plan for them. Think about how changes can affect your life, your savings, retirement, etc.

Experts suggest that you need to take all the benefits and advantages you can get before taking the leap. For instance, you may decide to take new glasses, new dental work, and the like. Get bare bones health coverage at least. If you want to quit your job and retire, stay at it for a while longer. This also applies if you want to invest in stock options, retirement savings, or for some other form of benefit.