These 9 rules will help you improve your financial health, whether you’re trying to get out of debt or reach the next level of wealth.
- Rule of 72 (Double Your Money)
- Rule of 70 (Inflation)
- 4% Withdrawal Rule
- 100 Minus Age Rule
- 10, 5, 3 Rule
- 50-30-20 Rule
- 3X Emergency Rule
- 40℅ EMI Rule
- Life Insurance Rule
Rule of 72 (Double Your Money)
No. of yrs 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 yrs
- At 6% rate, it will take 12 yrs
- At 9% rate, it will take 8 yrs
Rule of 70 (Inflation)
Divide 70 by the current inflation rate to know how fast the value of your investment will get reduced to half its present value.
If the inflation rate stays at 7% for 10 years, the value of your money will be reduced to half what it is today in 10 years. This is because a system of local currency and global currency converges. However, the effect of inflation on monetary value makes life in a country harder for people who live there.
4% Rule for Financial Freedom
Corpus Required = 25 times your projected Annual Expenses
For example, if your annual expense after 50 years of age is 500,000 and you want to take VRS, the corpus you need is 1.25 crore.
The first thing that you must know about VRS is that it has an inflation index. So your corpus needs to be adjusted every year.
Put 50% of this into fixed income & 50% into equity.
Withdraw 4% every yr, i.e. 5 lac.
This rule works for 96% of the time in 30 yr period
100 minus your age rule
When investing, it is important to keep in mind the risk of your chosen asset and how that asset will perform in the future.
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%
The return on investment of any business is a key factor in fueling the market. However, it is quite difficult to predict how much profit a certain project will generate before it goes into production. One should have reasonable expectations and expect returns to be within the range of 10-30%
- 10-30% Rate of return – Equity / Mutual Funds
- 5% – Debts ( Fixed Deposits or Other Debt instruments)
- 3% – Savings Account
The "50-30-20 Budget Rule"
The 50-20-30 budget rule is a personal finance budget plan that has been popularized by Senator Elizabeth Warren in her book, All Your Worth: The Ultimate Lifetime Money Plan
The idea of 50-30-20 split is not new at all. Every person in this world has to worry about the needs and wants aspect of their income. However, people start panicking when it comes to saving because they tend to think that they might be able to afford their wants if they save more.
It is a simple rule that is doing good on many people. It helps them not to overspend and stay within their budget.
The 50-30-20 rule is a personal budgeting method that simplifies the process of dividing your income into three categories:
- 50℅ – Needs (Groceries, Rent, EMI, etc)
- 30℅ – Wants (Entertainment, Vacations, etc)
- 20℅ – Savings (Equity, MFs, Debt, FD, etc)
At the very least, attempt to save 20% of your Income.
You can absolutely save more.
How to Implement the 3X Emergency Rule
Different people have different amounts of money they want to put aside in their emergency funds. Some may be as low as $1000, while others may be able to save millions in a bank account.
An emergency fund is an important financial tool to have when there’s a need to pay for expenses that might not be covered by insurance.
Always remember to put at least 3 times your monthly income in emergency funds for emergencies such as loss of employment, medical emergency, etc.
*40% EMI Rule*
EMIs are unsecured loans that can become quite expensive when they are borrowed often and in large amounts over a long period of time. So it pays off to spend less than 40% of your income on EMIs as that would make sure that you don’t go into debt too quickly and end up needing more loans later.
If You earn 50,000 every month. As a result, you should not have EMIs that exceed 20,000.
Life Insurance Rule
There are many people who cannot afford to save up and this includes the millennial generation. Sum assured is a financial tool that helps them save up to 20 times what they earn in a year. It’s easy for the millennial generation to use and it doesn’t require any special skills or knowledge.
20 X Annual Income
The 20X Rule is a simple, yet powerful strategy to help you save money for your future goals
If you earn 5Lacs per year, you should have at least $1 million in insurance coverage if you follow this rule.
These rules are equally useful for young, youth, and old. Hope you will find them helpful to your life.