After completing his home work on financial thumb rules, Rohan was very excited to meet a financial advisor from Circle Wealth Advisors. Malvika had never seen Rohan so excited before, she nudged him saying, ‘seems like good old times (before marriage)!’ Recognising that sly comment, Rohan simply smiled and looked away.

‘Ting Tong’  house bell rang. Rohan looked at his watch, amazed to find the financial advisor on time. Malvika looked at him and said, ‘you think everyone like you is late?’ Rohan knew, he couldn’t say anything as of now. Malvika was amazed at the professionalism displayed by the financial advisor as they were expecting someone with a lot of forms to be signed.

After exchanging initial greetings, Rohan and Malvika got down to some serious discussion with the financial advisor.

Rohan : The rule of 100 minus age suggests that I should be in 70% equity as of now. Is that viable or should I opt a different strategy?

Advisor : Great question. As you are 30 years old, thumb rule suggests 70% in equity. However, a correct method to look at it would be to have a complete view on your financial health first and then assess what allocation do you require towards equity. It will aslo depend on your financial goals and risk profile to derive the desired equity allocation in the overall investments. Stock markets go through their own cycles, it would also be advisable to look at the valuation aspect at the time of initial allocation.

Malvika : How much should we save and how much should we keep as emergency fund with us?

Advisor : Ideally, your emergency fund should be somewhere between 3 to 6 months of your expenses. It helps to save for short term fluctuations of life. Suppose, there is some event and urgent cash is required or loss of job then at such times, an emergency fund comes to rescue.

Savings should ideally depend on your expenses. With such a dynamic lifestyle, we often find hard to save. However, a family should save around 15-20% of their gross annual income every year.

Malvika : Should all our savings go for Retirement planning? As we are also keen on upgrading to a bigger car.

Advisor : We need to discuss and note down all your financial goals. They are all your short term and long term goals, however big or small. You then need to prioritise those goals depending upon how important and reachable that goal is. For example a dream vacation may be less important than providing for your child’s education. We will work out the resource required to reach each goal and then depending on what is agreed we will start allocating funds to the most important goals.

Retirement planning generally requires a huge capital and hence may constitute a major allocation of your assets and investments.

Malvika : How should we plan for a car?

Advisor : The most popular thumb rule for buying a car is 20 / 4 / 10, which implies that a consumer should make a minimum 20% downpayment and the loan tenure should not be more than 4 years with expenditure (includes EMI, fuel cost and insurance) on a monthly basis should not cross more than 10% of the gross monthly income.

Another way to interpret this rule is that the cost of the car should not be more than 40% of the annual gross income of the consumer. We had written a Thursday Trivia on the same, you could look into that.

Rohan : How much debt we should take a family? Should we stick to 36% debt rule?

Advisor : 36% debt rule is a great rule to restrict us from taking excessive debt. However, we must try to put a goal lower than that. Sometimes, while buying a house, we take on excessive debt as it’s a dream come true. But a question to be asked is, do we really need to take on so much pressure for the same?

Rohan : When is the right time to invest in stock markets?

Advisor : Excellent question. Everyone seems to be wanting to time the markets, but even Warren Buffet refrains from doing so. So don’t worry about it, as I said earlier, it will depend on your asset allocation and risk profile. Once that is done, we will look into how much we should allocate in equity and debt.

Satisfied with those answers, Rohan and Malvika were clear with their financial thumb rules. Rohan had read Part 1 and Part 2 of Thursday Trivia on Financial Thumb rules and this discussion taught him a lot more. As the final greetings were exchanged, both asked the financial advisor to visit them again next week.

– Jinay Savla

Disclaimer : This particular series of Financial Thumb Rules is only meant for educational purposes. We do not in any ways recommend it, as the case may differ for investors per se.