Striking a balance between not doing enough and doing too much is tough for money, as it is with relationships. Do too little and a guilt nags at you each time you have a moment. Do too much and you sacrifice your today for limited future gains and life becomes about not living. I’ll leave the relationship bit for you to sort, but let’s at least put the money issue in perspective. While each situation is different and each family needs its own unique financial plan, it is good to at least have some basic rules of the road to know if you are at least going in the right direction. Remember these ratios are just very rough rules that point you in a direction rather than a detailed Google map. For that, find a planner, pay his fees and get your bespoke plan made.
Ratio One answers the question: how much should I be spending and saving? Although the answer differs across ages and stages, it is fairly accurate to say that if you are spending about half your take-home income on your living costs, comforts and luxuries, you are doing fine. Usually the spending pressure is higher in younger ages due to limited income and lots of heads of spend, and by the 50s discretionary consumption can decide whether you are spending half or more of your take-home or just one-fifth of your money in hand each month. On an average, spending half your take-home is fine.
Ratio Two answers the question: how much should I be saving each month? The saving propensity varies over the years and it is especially tight when you are in your 20s and 30s. Growing families and soaring aspirations make it difficult to save. If you are doing 20% of your take home as savings, you are doing fine. Remember that you are already doing 24% of your basic (usually a smaller number than the take-home money) through your EPF. Whatever you can do on top of that in your 20s is good. In your 30s, you should be doing the 20% saving target. This can rise in your 40s and 50s if needed. On an average, saving 20% of your take home is good, whether you are self-employed or part of the organized sector.
Ratio Three answers the question: how much should I spend on my EMIs? Two incomes make it easier to handle debt, but things are so uncertain that is better to stay safe and keep your total EMIs to less than 30% of your take-home income. Home loan, car loan, gadget loan—everything should add up to no more than 30% of your monthly income.
Ratio Four answers the question: how much should I have in my emergency fund? Between six months to two years of your monthly spends. Depending on your age, stage and leverage level, choose within this range. Typically, a younger single person will go for six months and a person with many dependents and a single income will go for a year’s living money. Those in their 50s should already have plenty of assets for their retirement, from that, keep two years of expenses in near-liquid form. Between six months to two years is what you need.
Ratio Five answers the question: how much life insurance should I have? At least 10 times your annual income. But this number changes as you grow in your career and keep earning more. It is a good idea to take a 10 times income policy in your mid-30s when incomes are not that low as they are in the 20s. If you take a home loan, then don’t take a decreasing policy to cover the loan. Take another term to cover the loan and keep it as the second policy to bump up the overall cover. Keep the policy even after the loan is over. By the 50s, you should be more than halfway to your retirement kitty goal, therefore the need for a very large life cover reduces. You can continue your existing policies, but trying to cover your much larger income may not be useful. Anyway, when you have your retirement money in place, there is no need for a life cover. Ten times your annual income is the norm.
Ratio Six answers the question: how much should I have for my retirement? This is possibly the toughest question to answer. You literally need a degree in finance, economics, politics and a crystal ball to correctly gauge what you will finally need at 60. My own calculations show that you need between 18 and 35 times your annual spend at age 60 as your retirement kitty—18 times if you plan to not leave any money for the kids and eat out of the capital, 35 times if you plan to leave the entire money to the kids. A reasonable assumption is 26 times your annual spend at age 60. If you are going to be spending ₹20 lakh at age 60, then you need about ₹5.2 crore. I have overestimated your spending and underestimated returns. Another way to do this is to target three times your income by age 40, six times by age 50 and at age 60, have eight times your income. Remember that spending will be about 25-30% of the income by the time you are at the peak of your career at retirement. The numbers of spending ratio and income ratio will add up. About 26 times your annual spend at age 60.
Monika Halan is consulting editor at Mint and writes on household finance, policy and regulation.