Everyone should be aware of the following nine personal finance rules.
- 1) Rule 72 (Double Your Money)
- 2) Rule 70 (Inflation)
- 3) The 4% withdrawal limit
- 4) The 100-less-age
- 5) 10, 5, 3
- 6) 50-30-20
- 7) Emergency
- 8) 40℅ EMI
- (Rule 9) Life cover
1) Rule 72
Divide 72 by the interest rate to find the no. of years needed to double your money at a certain rate.
For instance, divide 72 by 8 to get nine years – If you want to know how long- it will take your money to double at 8% interest.
For example:
That will take 12 years at a 6% rate.
It will take eight years if the rate is 9%.
2) Rule 70
To determine how quickly the value of your investment will drop to half its present value, divide 70 by the current inflation rate.
Your money’s worth will be 50% reduced in ten years at a 7% inflation rate.
3) The 4% Rule for Financial Independence
Corpus needed = 25 times your projected annual expenses.
For example, if your annual expense is 500,000 after 50 years and you wish to take VRS, your required corpus is 1.25 crores.
Invest half of it in fixed income and half in equity.
Withdraw 4% of your annual earnings or five lakhs.
This rule works 96% of the time over a 30-year period.
4) Subtract 100 from your age
This rule use to allocate assets. Subtract your age from 100 to determine how much of your wealth should be in stocks.
Assume your age is 30, then (100 – 30) = 70.
70% equity
Debt: 30%
5) 10-5-3
Expected returns should be realistic.
10% Rate of return – Equities / Mutual Funds
5℅ – Debt instruments
3% – Savings Account
6) 50-30-20 – concerning the allocation of income to expenses
Split your income into
50% – Needs(Groceries, rent, emi, etc.)
30℅- Wants (Entertainment, vacations, etc.)
20% – Savings (Equity, MFs, Debt, FD, etc.)
At the very least, strive to save 20% of your salary.
You can certainly save more.
7) 3X In Case of Emergencies
Constantly save at least three times your monthly income for emergencies such as job loss, medical issues & so on.
Three times your monthly income
On the safe side, keep six times your monthly income in liquid or near-liquid assets.
8) 40℅ EMI
Never pay more than 40% of your salary into EMIs.
Take your monthly salary as 50,000. So, EMIs totaling more than 20,000 is not advisable.
Financial companies typically employ this Guideline when making loans.
It can use to control your finances.
9) Indemnity for Death
Always maintain an insurance(life cover) sum equal to 20 times your annual income.
20 times annual income
If you follow this rule, you should have at least one crore in insurance, assuming you make five lakhs annually.