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Financial planning can be very complex and difficult for people who have little or no knowledge in finance and investment. If you are now starting your financial planning journey, you may as well be wondering where and how to start.

Financial rules of thumb can assist you have a personalized financial plan that will suit your goals and needs. Financial rules of thumb are simplified financial principles, which serve as a guide in making financial decisions. They make complex financial concepts very easy to understand and apply. These rules seek to address procedures for budgeting, savings, investment, debt management and retirement planning.

Financial rules of thumb provide a general guide for making financial decisions and may not be applicable in everybody’s financial plan. However, you can decide to tweak them to suit your financial situation.

Below are some financial rules of thumb that you can adopt to assist you streamline your finances and investment.

I. Pay yourself first

The general rule to kick start your financial planning is to pay yourself first. How do you pay yourself first when you have worked and the whole income belongs to you? It simply means that anytime you receive an income, be it daily, weekly or monthly, you should try as much as possible to save a certain percentage out of your income before you decide to go on a spending spree. This rule helps you to save first before you start spending your income. Even if you have a tight budget, you should always make room for savings. Take note, “Income minus Savings equal to Expenses”. It is recommended that you should save at least 10%  of your daily, weekly or monthly income before you start spending. To be able to do this consistently and without stress you should set a standing or direct debit order on your bank account.

II. The 50/30/20 Rule

Have you been struggling with preparing a budget? Then the 50/30/20 rule will assist you prepare a budget. A budget is a simple tool to keep track of your inflows (income) and your outflows. This rule helps you to plan how much to spend and save each month. It simply guides you to live within your means. The 50/30/20 rule suggest that your income should be allocated between needs, wants and financial goals. 50% of your income should be allocated to your needs (ie. things that are necessary for your survival such as food, rent, healthcare, clothing and utilities), 30% of your income should be allocated to your wants (ie. things that are essential such as internet, electronic gadgets, vacations, eating out and entertainment) and 20% should be allocated to your financial goals (ie. savings and investment).

III. Emergency fund rule

An emergency fund provides financial support for you in the event of unforeseen circumstances like job loss or any unplanned expenses. Hence emergency fund serves as a safety net. Emergencies are unpredictable and will be very difficult to know the amount of money you will need or set aside for such situations. However, the financial rule of thumb for emergency recommends that you should have at least 3 to 6 months equivalent of your income saved for emergencies. You can set-up an emergency fund by opening an investment account which is easily accessible and make a conscious effort to put at least 10% of your monthly income into it.

IV. The 35% Rule for servicing debt

Sometimes you might need support in the form of a loan to meet certain life goals like buying a car, running a business or acquiring a house. However, before you commit yourself to acquire a loan, you should have a payment plan. The rule of thumb is that you should not use more than 35% of your monthly income to service your debt. You can run into a serious financial crisis if you are using more than 35% of your income to service your debt. You should also avoid taking on more debt if you are not done paying the initial one you took.

V. The rule of 72

Have you ever wondered how long it will take for your investment to double? The simple way to have a fair idea of when your investment is going to double is by using the rule of 72. This is by dividing 72 by the rate of return on your investment. Although rate of return on investment is not fixed, you can use the average rate of return on your investment for the estimation. For example, if the average return on your investment is 16%, then your money will double in 4 and half years (ie. Number of years =72/16 = 4.5 years). It is also important to be earning a rate of return on your investment that is above inflation.

VI. 10-20 rule for retirement planning.

One of the basic tenets of a comfortable retirement is a good retirement plan. The 10-20 retirement planning rule of thumb means you should save at least 10% to 20% of your income towards retirement. You may have to save even more than 20% of your income towards your retirement if you are above 45 years. And this can be done by having a personal pension plan which is under the three (3) tiered pension scheme.

VII. The 4% rule for retirees

The ultimate question is how much money will be enough for you on retirement? The 4% rule of thumb can be used by retirees to estimate how much they should withdraw annually from their retirement benefits. This rule suggests that the amount you should withdraw from your retirement benefit annually should not exceed 4% plus the rate of current inflation. For example, if current inflation is 12% then your withdrawal rate should be 16% of your retirement benefit. The rule seeks to provide a steady income for retirees on retirement and ensures that their retirement benefit is not depleted within a very short time. You can decide to buy an annuity plan on retirement to provide a steady income for you on retirement.

 

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Axis Pension Trust partners workers throughout their retirement planning journey to ensure they are on track to achieve a dignified retirement. For more information on our services or general enquiries, send an email to This email address is being protected from spambots. You need JavaScript enabled to view it. or call 030 273 8555.

 

Published in Mindset & Motivation

Financial planning can be very complex and difficult for people who have little or no knowledge in finance and investment. If you are now starting your financial planning journey, you may as well be wondering where and how to start.

Financial rules of thumb can assist you have a personalized financial plan that will suit your goals and needs. Financial rules of thumb are simplified financial principles, which serve as a guide in making financial decisions. They make complex financial concepts very easy to understand and apply. These rules seek to address procedures for budgeting, savings, investment, debt management and retirement planning.

Financial rules of thumb provide a general guide for making financial decisions and may not be applicable in everybody’s financial plan. However, you can decide to tweak them to suit your financial situation.

Below are some financial rules of thumb that you can adopt to assist you streamline your finances and investment.

I. Pay yourself first

The general rule to kick start your financial planning is to pay yourself first. How do you pay yourself first when you have worked and the whole income belongs to you? It simply means that anytime you receive an income, be it daily, weekly or monthly, you should try as much as possible to save a certain percentage out of your income before you decide to go on a spending spree. This rule helps you to save first before you start spending your income. Even if you have a tight budget, you should always make room for savings. Take note, “Income minus Savings equal to Expenses”. It is recommended that you should save at least 10%  of your daily, weekly or monthly income before you start spending. To be able to do this consistently and without stress you should set a standing or direct debit order on your bank account.

II. The 50/30/20 Rule

Have you been struggling with preparing a budget? Then the 50/30/20 rule will assist you prepare a budget. A budget is a simple tool to keep track of your inflows (income) and your outflows. This rule helps you to plan how much to spend and save each month. It simply guides you to live within your means. The 50/30/20 rule suggest that your income should be allocated between needs, wants and financial goals. 50% of your income should be allocated to your needs (ie. things that are necessary for your survival such as food, rent, healthcare, clothing and utilities), 30% of your income should be allocated to your wants (ie. things that are essential such as internet, electronic gadgets, vacations, eating out and entertainment) and 20% should be allocated to your financial goals (ie. savings and investment).

III. Emergency fund rule

An emergency fund provides financial support for you in the event of unforeseen circumstances like job loss or any unplanned expenses. Hence emergency fund serves as a safety net. Emergencies are unpredictable and will be very difficult to know the amount of money you will need or set aside for such situations. However, the financial rule of thumb for emergency recommends that you should have at least 3 to 6 months equivalent of your income saved for emergencies. You can set-up an emergency fund by opening an investment account which is easily accessible and make a conscious effort to put at least 10% of your monthly income into it.

IV. The 35% Rule for servicing debt

Sometimes you might need support in the form of a loan to meet certain life goals like buying a car, running a business or acquiring a house. However, before you commit yourself to acquire a loan, you should have a payment plan. The rule of thumb is that you should not use more than 35% of your monthly income to service your debt. You can run into a serious financial crisis if you are using more than 35% of your income to service your debt. You should also avoid taking on more debt if you are not done paying the initial one you took.

V. The rule of 72

Have you ever wondered how long it will take for your investment to double? The simple way to have a fair idea of when your investment is going to double is by using the rule of 72. This is by dividing 72 by the rate of return on your investment. Although rate of return on investment is not fixed, you can use the average rate of return on your investment for the estimation. For example, if the average return on your investment is 16%, then your money will double in 4 and half years (ie. Number of years =72/16 = 4.5 years). It is also important to be earning a rate of return on your investment that is above inflation.

VI. 10-20 rule for retirement planning.

One of the basic tenets of a comfortable retirement is a good retirement plan. The 10-20 retirement planning rule of thumb means you should save at least 10% to 20% of your income towards retirement. You may have to save even more than 20% of your income towards your retirement if you are above 45 years. And this can be done by having a personal pension plan which is under the three (3) tiered pension scheme.

VII. The 4% rule for retirees

The ultimate question is how much money will be enough for you on retirement? The 4% rule of thumb can be used by retirees to estimate how much they should withdraw annually from their retirement benefits. This rule suggests that the amount you should withdraw from your retirement benefit annually should not exceed 4% plus the rate of current inflation. For example, if current inflation is 12% then your withdrawal rate should be 16% of your retirement benefit. The rule seeks to provide a steady income for retirees on retirement and ensures that their retirement benefit is not depleted within a very short time. You can decide to buy an annuity plan on retirement to provide a steady income for you on retirement.

 

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Axis Pension Trust partners workers throughout their retirement planning journey to ensure they are on track to achieve a dignified retirement. For more information on our services or general enquiries, send an email to This email address is being protected from spambots. You need JavaScript enabled to view it. or call 030 273 8555.

 

Published in Mindset & Motivation

If I should ask you about your employment benefits, you will most likely emphasize on your take-home salary. For most employees, there may be other benefits that may not have been considered. What are they? How much is it worth to you? Are you missing out on opportunities to;

1. Reduce expenses

There may be expenses that you would have incurred if weren’t working with your current employer, an example is lunch. If it would have cost you GHC 600 to get lunch, you can take the expense item out of your budget and allocate the funds towards other important expenses or invest it.

2. Plan for your retirement

Beyond contributing to the mandatory Tier 1& 2 pension schemes, some employers contribute to Tier 3 PF or personal pension, unregistered provident fund schemes or may even have health benefits for their retired employees and their spouses at retirement. Having these benefits can make a significant difference and ensure a comfortable retirement.

3. Plan towards other future goals and create wealth

Apart from retirement plans and other cost savings opportunities mentioned earlier, other benefits like cheap loans, bonuses, allowances, cash gifts, commission, and employee stock option plans, professional development if used properly can help you create wealth and achieve your finance goals.

 4. Prepare for financial emergencies.

 Do you have access to benefits that help you handle emergencies that may come your way? Having a health insurance can help save money and give you peace of mind when you encounter health emergencies. Beyond this, your employment benefits may include other insurance products or arrangements to help you deal with unforeseen contingences.

 5. Reduce your tax burden

 Some employment benefits come with tax saving opportunities. Beyond the value you derive from that benefit, you also get to reduce your tax burden! An example of this is the tier 3 provident I mentioned earlier that allows you tax savings of up to 16.5% of your basic salary.

It is essential that you know, understand and take advantage of all opportunities you are entitled to. Review your employment contract or have discussion with the HR or whoever is in charge of employee benefits to understand what you are currently entitled to. If there are any good opportunities you haven’t fully taken advantage of, start now. If you are considering a job or career change, being well-informed about benefits offered by the available options will help you make better money decisions.  It is important to look beyond your take-home but instead focus on but the long-term value of your entire compensation.

 

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Axis Pension Trust partners workers throughout their retirement planning journey to ensure they are on track to achieve a dignified retirement. For more information on our services or general enquiries, send an email to This email address is being protected from spambots. You need JavaScript enabled to view it. or call 030 273 8555.

Published in Career