16/12/2023
🔎ELEVEN PERSONAL FINANCE RULES🔍
1) Rule of 72 (Double Your Money)
2) Rule of 70 (Inflation)
3) 4% Withdrawal Rule
4) 100 Minus Age Rule
5) 10, 5, 3 Rule
6) 50-30-20 Rule
7) 3X Emergency Rule
8) 40℅ EMI Rule
9) Life Insurance Rule
10) Rule of 144
11) Revolving Credit Formula:- (1+i%)^12-1.
1) Rule of 72
No. of years required to double your money at a given rate, U just divide 72 by interest rate. Eg, if you want to know how long it will take to double your money at 8% interest, divide 72 by 8 and get 9 years.
At 6% rate, it will take 12 years
At 9% rate, it will take 8 years
2) Rule of 70
Divide 70 by current inflation rate to know how fast the value of your investment will get reduced to half its present value.
Inflation rate of 7% will reduce the value of your money to half in 10 years.
3) 4% Rule for Financial Freedom
Corpus Required = 25 times of your estimated Annual Expenses.
Eg- if your annual expense after 50 years of age is 500,000 and you wish to take VRS then the corpus with you required is 1.25 crore.
Put 50% of this into fixed income & 50% into equity.
Withdraw 4% every year, i.e.5 lacs.
This rule works for 96% of time in 30 years period
4) 100 minus your age rule
This rule is used for asset allocation. Subtract your age from 100 to find out, how much of your portfolio should be allocated to equities
Suppose your Age is 30 so (100 - 30 = 70)
Equity : 70%
Debt : 30%
But if your Age is 60 so (100 - 60 = 40)
Equity : 40%
Debt : 60%
5) 10-5-3 Rule
One should have reasonable returns expectations
10℅ Rate of return - Equity / Mutual Funds
5℅ - Debts ( Fixed Deposits or Other Debt instruments)
3℅ - Savings Account
6) 50-30-20 Rule - about allocation of income to expense
Divide your income into
50℅ - Needs (Groceries, rent, emi, etc)
30℅ - Wants / Desires (Entertainment, vacations, etc)
20℅ - Savings (Equity, MFs, Debt, FD, etc)
At least try to save 20℅ of your income. You can definitely save more...
7) 3X Emergency Rule
Always put at least 3 times your monthly income in Emergency funds for emergencies such as Loss of employment, medical emergency, etc.
3 X Monthly Income
In fact, one can have around 6 X Monthly Income in liquid or near liquid assets to be on a safer side.
8). 40℅ EMI Rule
Never go beyond 40℅ of your income into EMIs.
Say if you earn ₹ 50,000 per month. Then you should not have EMIs more than ₹ 20,000 .
This Rule is generally used by Finance companies to provide loans. You can use it to manage your finances.
9) Life Insurance Rule
Always have Sum Assured as 20 times of your Annual Income.
20 X Annual Income
Say you earn ₹ 5 Lacs annually, you should atleast have 1 crore insurance by following this Rule.
10) Rule of 144 -
No of years it takes to double your money at a given rate, when investment is done via SIP. E.g . If rate is 15% then sip corpus will double in 144/15= 9.6 years .
11) Revolving Credit Formula:- (1+i%)^12-1.
Example:- If a credit card Company charge's 3% per month as interest. The Compound Annual cost is = (1+3%)^12-1 = 42.6%
These rules are equally useful for young and old.
