Key Highlights
- Personal finance management is essential for achieving financial stability and security.
- There are several personal finance “rules of thumb” that can help individuals manage their finances, including saving at least 30% of monthly income, being able to afford purchases at least twice, renting a home that is less than 30% of your income, and having an emergency fund that can last at least 5-6 months of living expenses.
- Following these guidelines can help individuals create a safety net, avoid financial strain, and achieve peace of mind and financial security in case of unexpected events.
With the prices of everyday items going up, and new and exciting products being launched every now and then, more than ever consumers have a lot of competing for their scarce resources. It is exhausting to even begin to plan how to meet up with these expenses not to talk of following through with the said plans.
Some have resorted to the lackadaisical approach. “Let’s just see how it goes”, they proclaim.
However, there are some simple financial guidelines that we have christened the “Personal Finance Rule of Thumb ” that could help you declutter the mess and make head and tail of your finances. Like several other rules of thumb, our financial guidelines may not be attainable a hundred percent, but the closer one is to attain them, the better.
Before we proceed, you may want to answer these questions to evaluate your financial state.
- Do you save up to 20% of your monthly income?
- Does your rent for a full year fall under 30% of your annual income?
- Are your mandatory bills less than 50% of your annual income?
- Do you have an emergency fund?
- Do you make sure you can afford your gadgets more than twice before purchasing them?
NB: These questions are Yes or No types of questions.
Personal Finance Rules
- Save at least 30% of your monthly income: Many people live without any safety net or buffer. The entirety of their monthly income is spent even before a new paycheck comes in. The perfect definition of living from paycheck to paycheck. This is a dangerous way to live as most jobs these days are not as secure as many are made to believe. At least 30% of your income should be carefully tucked away in a savings account. The other 70% should be split between needs and luxury, with 50% taking care of the needs and 20% catering to wants and luxury.
- Be able to afford it at least twice!: There will always be a new and shiny thing to buy. If you are an iPhone freak then you would get tempted every other year to upgrade to the latest phone release since Apple launches a new iPhone every year. However, it is important to evaluate your financial situation and cut your coat according to your size. Resist the urge to sugarcoat your financial condition and objectively determine if you can afford a gadget or not. The rule of thumb here is being able to afford it twice. For example, only purchase an N2m car if you have at least N4m sitting comfortably in your bank account.
- Rent a home less than 30% of your income: Who doesn’t want to live in expensive and top-brow areas like Beverly Hills in California, Banana Island in Lagos or Maitama in Abuja? While many want to settle down there, the truth is that most people are unable to rent or own apartments in those areas. In the same way, some other relatively expensive neighbourhoods may be way out of your budget. Don’t allow the herd to influence your decisions. Just because a lot of your coworkers live in a certain neighbourhood is not enough just to move in there too. Your rent should not take up to any more than 30% of your annual income. If you earn N1m yearly, your house rent shouldn’t exceed N300k.
- You should have an emergency fund that can last you at least 5-6 months of living expenses: The bubble of job security can burst sometimes when we least expect it to. For example, after Elon Musk’s acquisition of the microblogging platform Twitter, the American billionaire went on to retrench about 80% of Twitter’s employees. While this kind of downsizing is rare, what isn’t is waking up and realising that you have just lost your job. This is why you need to have an emergency fund that would cater for your needs in case of emergencies like a job loss, a health challenge or any other mishap that effectively shuts the door to your regular earnings.