Nine personal finance rules that everyone should follow right from today to take control of their money and become rich.
The ‘Rule of 72’ gives you an estimate of the number of years it will take to double your money in a particular investment tool. You need to divide the rate of returns by 72 to know the time it would take you to double your investments.
According to Ashish Aggarwal, MD, Acube Ventures, anything that expands at a compound rate, including the population, macroeconomic data, charges, or debts, may be subject to the Rule of 72. The economy is predicted to double in 72 / 4% = 18 years if the GDP expands at a rate of 4% per year.
“The Rule of 72 can be used to illustrate the long-term implications of these charges to the fee that reduces investment gains. The investment principal of a mutual fund with a 3% annual expense fee will be cut in half in about 24 years. In six years, the amount owed by a borrower who pays 12% interest on their credit card (or any other type of loan that has a compound interest) will have doubled,” said Ashish Aggarwal.
2) 100- Age Rule
The basic principle behind age-based asset allocation is that your exposure to investment risk needs to reduce with age. It is primarily referred to as the proportion of equity as a component of your portfolio as these investments offer a higher return at a greater risk.
Suppose your current age is 40 years. Your portfolio may have 60% equity-oriented investments and the remaining 40% among debt funds and fixed-income securities. But if your age is 60, then it will be the other way, 40% in equity investments, and the remaining 60% in debt.
Suppose your Age is 40 so (100 – 30 = 70)
Equity : 70%
Debt : 30%
But if your Age is 60 so (100 – 60 = 40)
Equity : 40%
Debt : 60%
3) 50-30-20 Rule
One of the most widely used and simple to comprehend budgeting strategies is the 50-30-20 rule. The rule says that a person should divide his/her take-home salary into three categories: needs (50%) wants (30%) and savings (20%). “The rule’s simplicity lies in its ease of comprehension and application, which enables each person to set aside a fixed portion of their monthly income for savings. The guideline says that people should keep track of their spending, particularly if they have trouble saving money at the end of each month,” said Agam Gupta, Executive Director, Share India FinCap.
4) 1st Week Rule
To bring discipline in investing, personal finance experts advise you to save and invest the 20% allocated amount for savings from your income in the first week itself.
“Few things can harm your budget more than impulsive purchases. Here’s a tip for impulsive shoppers: wait a week before purchasing anything new and shiny if it catches your attention. This allows you more time to consider your options. How much will this purchase be worth? What is the investment’s return? What is the value of resale? Is there a better way to use this money? Go ahead and make the purchase if, a week later, you’re still feeling strongly about it. However, it’s likely that after giving it a close examination, you’ll decide you don’t really need it, saving you money,” said Agam Gupta, Executive Director, Share India FinCap
5) 40% EMI Rule
The 40% EMI rule is very simple. You need to ensure that your entire monthly installment debt doesn’t surpass 40% of your income.
“Debt is a cunning thing. They gradually eat away at your revenue until you are left with very little. The 40% EMI guideline is an easy approach to keep them in check. This reduces your stress levels and helps you keep your bills in check,” said Ashish Aggarwal, MD, Acube Ventures.
6) 6X Emergency Fund
Keeping in mind the untoward incidents of the future, people should always put at least six times their monthly income in Emergency funds in case of exigency caused by loss of employment, medical emergency, etc.
For eg, if your monthly expenses are ₹2 lakh, you should park ₹12 lakh in your bank account to take care of unfavourable circumstances.
To evaluate the minimum sum assured in term life insurance, the best way to calculate is twenty times the annual income, thereby meaning if your current annual pay is ₹24 lakh, you should have a life insurance cover of at least ₹4 crore 80 lakh.
8) 2X Savings Rule
Your money in a savings bank will yield very poor returns. It’s better to consult your bank and activate the“Auto-Sweep” facility in your savings account.
How does the auto sweep feature work? The auto sweep feature is a way to make the most of the money in your savings account. When your account balance goes above a certain amount, the extra money is automatically moved to a fixed deposit account that offers higher interest rates So, basically, it increases your yield on a savings account to 5-7% by giving you FD-like returns
9) 25X Retirement Rule
The rule of 25X is the thumb rule when it comes to retirement savings, where you need to save 25 times your annual expenses.
This rule says that an individual can think about retirement when they have funds worth 25 times their annual expenses. So, if your annual expense is 24 lakh, you can think about retiring if you have a corpus of ₹6 crore.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 21 Dec 2023, 06:15 AM IST