9 Personal Finance Rules
If you are struggling to figure out how much you should invest in equity, when should you be withdrawing money from your investments, when would your money double, let’s figure all of that out using the following personal finance rules which you all should know
- THE RULE OF 72 :- You will get to know in what duration will your investment amount double itself by dividing 72 by the rate of return on your investment. For eg: if your investment has 8% as ROE then in about (72/8 = 9) 9 years your investment amount will double itself
- INFLATION ADJUSTMENT/ RULE OF 70 :- If you seek to know in what duration the value of your money decreases divide 70 by the inflation rate. Lets assume inflation rate is 6% then in approximately (70/6 ~ 12) 12 years your money will get decreased to half its value
- THE 4% WITHDRAWL RULE :- Always this question gets asked when you invest money then at what point should we withdraw that, how to withdraw and how much to withdraw, and for that we have this rule. Firstly you should be multiplying your yearly expenses by 25 to figure out approximately the amount that you would be requiring at the age of retirement because that is approximately the time that you will be living after retirement (For eg if yearly expense is 50 years then amount = 5L * 25 = 1.25 Cr) . When you would be retiring with this corpus then each year you would be withdrawing 4% each year which is the amount that you require in order to live life. During that time hopefully your 1.25 Cr would be growing in whatever investments you have made (debt, equity, combination of both etc.)
- THE 100 MINUS AGE RULE :- This tell you the percentage of your investable amount that you should ideally be investing into equities with respect to your age. (100-your Age) calculate this number and that much percentage should be the ratio of your investable amount that you should ideally be investing into equities. For eg age = 25, then 100–25 = 75%, then I nee to invest 75% of my investable amount in direct equities which can be stocks, mutual funds, small cases or a combination of those. Rest 25% you can split it in other asset classes — digital gold, corporate bonds, crypto, save the money in emergency funds.
- THE 10–5–3 RULE :- This rule gives you a reasonable idea about what returns should you be expecting on your investments post tax. Assume that your investments gives you post tax around 10% annual return, 5% is your fixed deposit post tax return ( usually don't get that much on FD), 3% is the return that your savings in your bank account gives. This rule holds important because majority people in their chase towards short term returns tend to forget the fact that they earn the same reasonable return every year on a long term investment with great difficulty. So evening if your ROE is 10%,your money is getting doubled every 7 years, hence in order for your money to increase 16 folds all you need to do is to stay invested for around 30 years. Be reasonable around the returns that you can get.
- THE 50–30–20 RULE :- This is a very powerful rule for those who are simply unaware of the how to budget their monthly expenses. 50% of monthly cash inflows should go towards your needs (EMI, Rent, expenditure on food, clothing, bills etc.) 30% goes towards your desires (phone, car, vacation) whatever you wish to spend your money on and finally minimum 20% for investments.
- THE 6X RULE :- Before you start your investment journey you must be having at least 6 times your monthly expenses (your needs only) saved as an emergency fund. You would be taking a big risk upon yourself otherwise. This emergency fund you should be splitting into 70:20:10 ratio-70% should be kept secured in a FD, 20% in your savings account from where you can withdraw anytime and remaining 10% you should be having as hard cash for any immediate need. You should also be having a health insurance as well as life insurance. I cant emphasize the significance of these two after what this world has faced in the last two years.
- THE 40% RULE :- This rule states that the combined EMI for all of your loans should come within 40% of your monthly cash inflow. If you are having more than 40% of your monthly cash inflow as your EMI then you are over leveraged. This swallows up all your savings and also you aren't getting opportunity to invest according to the “50:30:20 Rule” which pushes your investments to the future and you are having very less chances of retiring with your desired amount.
- THE 25X RULE :- This rule states that you should be multiplying your annual income with 25 and that should be your ideal life insurance cover. So if your annual income is 5L then an ideal life cover would be 1.25 Cr so that in unprecedented circumstances your family should get that corpus which if they manage properly can help them manage their expenses for the next 25 years.
These are the 9 personal finance rules which would help you to take charge of your money.