Some Personal Finance Rules of Thumb!

 Following gives you some of the Rules of thumb to help you in Personal Financial Planning

A. Rule of 72 (Double Your Money)

B. Rule of 70 (Inflation)

C. The  4% Withdrawal Rule

D. The 100 Minus Age Rule

E. The  10, 5, 3 Rule

F. The  50-30-20 Rule

G. The 3X Emergency Rule

H. The  40℅ EMI Rule

I.   Life Insurance Rule

You have several financial goals to achieve as you progress in age and shift to another phase in life. Let us look how these rules come handy.

A. Rule of 72

 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

  

B. 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.

 

C. The 4% Rule for Financial Freedom

 

Corpus Reqd = 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 corpus with you required is 1.25 cr.

 

Put 50% of this into fixed income & 50% into equity.

 

Withdraw 4% every yr, i.e.5 lac.

 

This rule works for 96% of time in 30 yr period

 

D. The 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%

 

E. The 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

 

F. The 50-30-20 Rule - about allocation of income to expense

 

Divide your income into

50℅ - Needs  (Groceries, rent, emi, etc)

30℅ - Wants  (Entertainment, vacations, etc)

20℅ - Savings  (Equity, MFs, Debt, FD, etc)

 

Atleast try to save 20℅ of your income.

You can definitely save more

 

G. The 6X Emergency Rule

 

Always put atleast 6 times your monthly expenses in Emergency funds for emergencies such as Loss of employment, medical emergency, etc.

 

H. The 40℅ EMI Rule

 

Never go beyond 40℅ of your income into EMIs. 

 

Say you earn, 50,000 per month. So 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. 

 

I. Life Insurance Rule

 

Always have Sum Assured as 15 times of your Annual Income 

 

15 X Annual Income

 

Say you earn 5 Lacs annually, u should,  atleast have 75 lac life insurance as per  this Rule