- A senior citizen aged 75 years old has 50 per cent allocation to equities. Ideally, as per the 100 minus age rule, his equity exposure should be maximum 25 per cent (100-75). But he can afford to and is willing to take additional risk. Why? His retirement situation allows him to do so – well settled independent children, more than adequate retirement corpus, regular pension income, long term experience in the stock markets and good health.
- A 40 year old individual has nearly 1.5 years of household expenses parked in a liquid fund for contingency. Ideally, emergency fund equivalent to 3-6 months of expenses is adequate. Why does he need to park unusually large amount in a liquid fund? He is self-employed and his business income is quite erratic. Further, he and his family have some serious health issues. His senior citizen parents do not have a health cover and have a health history too.
- A 38 year old individual’s life cover is not commensurate with the high income earned. He earns Rs.20 lakh per annum, but his term life cover is just Rs.1 crore. As per thumb rule, it should be 15-20 times his income, at least Rs.3-4 crore. At 38, he already has accumulated good financial assets, i.e., income earning assets which is 5 times his life cover. He started investing early in growth assets like equities and has zero loans.
These anecdotes defy the conventional thumb rules in personal finance.
Personal finance is not rocket science but has its own nuanced layers. Every person’s life and financial situation is different including their finances, lifestyle, dependents, family environment, relationships, health status, savings mindset, money habits, risk taking ability, psyche.
Thumb rules can be a good guide to understand personal finance. But a blanket approach using these guidelines paves the path for oversimplification. It does not make sense as these rules will not be uniformly applicable to each and every person and his/her financial situation. Personal finance is personal indeed.
As quoted by Albert Einstein – ‘Everything should be made as simple as possible, but no simpler.’