Managing your finances can be intimidating if you’re new to it, but there’s no dearth of information to help you get started. Personal finance is slowly becoming one of the most accessible branches of finance and it only takes mastering a few simple rules for you to be able to save, spend and invest simply but effectively.
Here are 9 financial rules that we should all know better to do that:
- The Rule of 72: find out how long it will take to double your income
The more you earn, the more you’ll be able to save, so this can be a pretty handy rule to know how soon you’ll be able to double your income so you can plan your future finances accordingly. Take the number 72 and divide it by any given annual interest rate. For example, if you want to know how long it will take to double your income at a 8% interest rate, you would divide 72 by 8 and get 9 years. Similarly, at 9% interest, it would take 8 years and so on.
- Rule of 70: know how fast your investment will depreciate
Just like it’s important to know whether it’s worth subscribing to an OTT, it’s important to know whether an investment is worth continuing based on how fast or slowly it’s depreciating. Divide the number 70 by the current inflation rate to know how quickly the value of your investment will be reduced to half of what it is now. For example, at an inflation rate of 7%, your investment will be reduced to half of what it is in 10 years.
- Rule of 100 minus your age: learn how to allot your stocks
It’s always a bit iffy to know if you’re saving and investing enough at your current age and how much that should change as you get older, which is where this rule comes into play. Take the number 100 and subtract your age from that number. What is left is how much of your income should be going into savings/investments whereas your age is how much money you can borrow. For example, if you’re 32, 32% of your income should account for the amount of loans or EMIs you have while 68% should be invested or saved.
- Rule of 10-5-3: find out how to allocate assets
Depending on whether you spend, save or invest too much, it can be a problem for you in the present or the future. The 10-5-3 rule lets you know the generic rates of returns so that you can keep reasonable expectations regarding your returns. The rule states that the annual rate of returns on equity/mutual funds is 10%, the rate of returns on debts like bonds are 5% while the rate of returns from your savings account is about 3%. This should give you an idea of how hard your money can work for you depending on what you do with.
- Rule of 50-30-20: know how to allocate income to expenses
For those who are just beginning to learn about personal finance and are unsure about whether they’re saving enough for their long term goals or investing enough to generate wealth. When in doubt, just remember the 50-30-20 rule. 50% of your spending should be going towards your day to day needs, like rent, EMI payments and groceries. 30% should be allocated to long term wants and desires, like a vacation or the purchase of an expensive gadget while 20% should be kept aside for savings and investments in equity, mutual funds, fixed deposits, etc. Be advised, however, that with inflation, perhaps these percentages may differ.
- Rule of 3X income: what does it take to survive emergencies
It took a global pandemic to truly teach us the value of having an emergency fund, just in case the unpredictable happens to catch us off guard. So how much should you have in your emergency fund for it to make any real difference? The general rule of thumb is that you should three times your monthly income in your emergency fund in case of eventualities like a job loss or sudden health issues. Some would even suggest that it would take 6X of your monthly income to ensure income stability.
- Rule of 40% EMI: how many EMIs can you have at any time
EMIs are a great way for people to be able to manage their finances while still being to afford the necessities. Most financial experts, however, do believe there should be a limit to how much your EMI payments amount to, which is 40% of your monthly income. For example, if you were earning INR 40000, then your total EMIs shouldn’t amount to more than INR 16000.
- Rule of life insurance: learn what the sum assured in your policy should be
It can be challenging to pick out term life insurance for those are new to it but, as a general rule, the minimum sum assured in your policy should be 10 times your annual income. For example, if you’re earning about INR 12 lakhs a year, you should have a life insurance cover of at least INR 1 crore.
- Rule of 4%: how much money will you need to retire early
Experts believe that the corpus you need to retire early is 25X your estimated annual expenses at the age that you want to retire at. For example, if you want to retire at the age of 50 and your annual expenses would be INR 5 lakhs, then you would need INR 1.25 crore. Put this entire corpus into fixed income and keep increasing the allocation to equity by 2-4% every year to reach an equity allocation as per the Rule of 100 minus your age. You will be able to withdraw 4% of this corpus each year, which will amount to your annual expenses i.e. INR 5 lakhs.