Personal Finance Rules

Personal Finance Rules – Every Individual Must Know

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Every company will work under a set of rules, Government will also follow its own rule and set rules for citizens and government employees too(generally known as guidelines). All these rules are made for the fulfilling growth of the economy and country. The company’s rules help the company to make greater sales generate great revenue and to provide a hassle-free environment during the process

As an individual, you should be already having some rules for your lifestyle, and protect your values. Why not have rules for your finances? Why not have rules for your spending? And not to forget, why not have rules for your investing?

You will get to know about some investing rules in the next post. But for now, in this post, you will learn a few of the important personal financial rules for your budgeting, the time it takes for your investments to double, or triple and plan accordingly, and also the EMI rule.

Sometimes people make decisions emotionally with finances and these emotional decisions most often lead to spending beyond a limit and may lead to a debt trap. And if you are a person who saves most of your income compromising your needs, desires, and also health, still you feel regret, not for saving money but for not knowing how much to save while living a life you deserve.

All these rules will surely help you immensely and improve your financial decision-making.

Rule 1: 50 - 30 - 20 Rule

This rule tells you the recommended split of your income. 50, 30, and 20 in this rule are the percentages that you need to allocate to your NEEDS, WANTS, and SAVINGS respectively.

Whenever you receive your paycheck, this rule ideally tells you that

  • 50% of your income should go towards your Needs.
  • 30% of your income should go towards your Wants.
  • 20% of your income should go towards your Savings.

Needs are the thing that you need to spend your money on for sure, you can’t escape Like your rent, mobile bills, internet bills, insurance premium, fuel expenses, etc.

Wants are basically what you wish for. For Example, you may want to go on a vacation or upgrade your mobile, laptops, etc.

Are you aware of what are your Needs and Wants? 

Needs and Wants are more individual things than universal. For example, if I just want to purchase an iPhone, that’s my want at the same time, you are happy with your current mobile so u may wish to have a new Bike, that’s what you want.

Calculate your Salary Split Here

Rule 2: 3X Emergency Rule - Emergency Fund/Continuity Fund

I am salaried, and I am not sure when I will get fired from my job, and I can’t control it. I may be unemployed when there is an economic slow down just happened like during COVID. But what I can do is possibly upskill myself to be in the race till the end. 

What would you do if you got fired? Can you say your expenses stop until you find a job?

So this rule says, to have at least 3 months of your expenses(NEEDS) should be always available with you, maybe as cash in the bank, Liquid Mutual Funds, or Fixed Deposits.

Please note this rule says to always have money for your NEEDS not for other misc expenses like purchasing mobile, gadgets, or furniture, refer to rule one.

There are variations for this rule too. Some suggest keeping a side of your money that covers at least 6 months to 1 year of your expenses.

I recommend Higher the Better. For example, if you manage to save for 50 years of your expenses then you need not work for your lifetime. But what people generally do is, save for their 1-year or 2-year expenses as Emergency Fund and invest the rest in stocks, mutual funds, and real estate.

Personal Finance Rules | Emergency Fund
Personal Finance Rules | Emergency Fund

Rule 3: Life Insurance Rule(20x to 25x)

While you are looking to opt Life Insurance Policy you would at least once think about what cover should you stick with. Most people are not sure how much insurance coverage they should take, and may choose to be underinsured or overinsured.

This rule says that: while you opt for Life insurance cover, You should take 20 times your annual salary as a Life Cover. So if you lost your life in an unfortunate situation, your dependents are at least financially safe with your 20 years of annual salary.

For Example, If your Annual Salary is 5Lakhs INR, then you should have a life cover of a minimum 1Cr and a maximum of 1.25 Cr.

You can’t get such high Cover for Life cover in fancy policies like Money Back schemes or others, they are regular savings schemes offered, but not Insurance schemes. 

Term Insurance Plan is the Pure Life Cover. And for Life insurance, I recommend a term plan too. You will get to know more in the Insurance Planning series.

Note: There is a piece of important information you need to be aware of, Most people think of an insurance policy as a great investment option, thinking that they can get their money back after the end of the policy term. Please note, Insurance and Investment are different things. Never mix your insurance with investments.

Rule 4: Health Insurance Rule

With rising medical advancements and rising treatment costs, the expenses one can incur for any kind of treatment are rising. Also, the inflation in the medical field is around 15%. So to cover these expenses one should at least have the medical insurance of Cover 5 Lakhs and can extend up to 50% of one’s annual salary. 

Don’t forget that taking health insurance is like protecting your money from an unplanned and unexpected health emergency.

For more on health insurance: Check out the Insurance Planning Series.

Personal Finance Rules | Health Insurance
Health is Wealth

Rule 5: 40% EMI RULE

In one or another situation, you may be needed to take EMI for your home loans, vehicle loans, or maybe some online purchase.

The 40% EMI rule suggests one should not have an EMI bill(collection of all EMIs) to be paid greater than your 40% of monthly in-hand salary.

For Example, If your monthly in hand is 40,000 Rs, You should not have EMIs to pay more than 16,000 Rs (40% of 40,000Rs).

Personal Finance Rules - EMI
40% EMI - Credit Rule

Bonus Tip: Escape Impulse Buying

Due to the creativity of Advertisement agencies and many fancy product reviews you may be tempted to purchase the product or service you see or listen to. But in reality, you may not be needed that product. But still, you fall a pray for those creative ads and end up with that purchase this is called Impulse Buying.

Do yourself a favor, If you stop spending on such expenses, If you could control those impulse feelings, you could save a lot of money. How can you control your impulse buying? Just a small hack, postpone the purchase decision for a week. And after a week if you still feel the same level of enthusiasm to purchase, then you can go with that purchase of that product or service.

In most situations, if the product doesn’t add any value to you then you eventually lose interest to purchase that product. 

Image Credits

All the information shared is for educational purposes only. The blog Finance Made Easy( and the author is not responsible for your financial decisions.

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