Understanding and managing personal finance is not everyone’s cup of tea. The good news is that it isn’t about micromanaging every penny. Analyzing current spending and saving based on analysis can give you control—and confidence. Most everyone’s financial situation will change over time. A new job, marriage, children, and other life events may change cash flow. It’s a good idea to revisit spending and saving regularly, particularly after any major life events.
Here’s some of basic but critically important personal finance rules
- 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 144
- Revolving Credit Formula
Rule of 72
Number of years required to double your money at a given rate, you just need to divide 72 by interest rate.
For example, 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
Similarly,
At a 6% rate, it will take 12 years
At a 9% rate, it will take 8 years
Rule of 70
Divide 70 by the current inflation rate to know how fast the value of your investment will get reduced to half its present value.
The inflation rate of 7% will reduce the value of your money to half in 10 years.
4% Rule for Financial Freedom
Corpus Required = 25 times your estimated Annual Expenses.
Example, 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 12.5M.
Put 50% of this into fixed income & 50% into equity.
Withdraw 4% every yr, i.e. 500K.
This rule works for 96% of the time in 30 years period
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%
10-5-3 Rule
One should have reasonable returns expectations from different asset classes.
10% Rate of return – Equity / Mutual Funds
5% – Debts ( Fixed Deposits or Other Debt instruments)
3% – Savings Account
50-30-20 Rule
About the the the 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.)
At least try to save 20% of your income. The more you will save and invest – the better.
You ideally should always put at least 3 times your monthly income in Emergency funds for emergencies such as loss of employment, medical emergency, etc.
3X Monthly Income
One can have around 3 times of average Monthly Income in liquid or near liquid assets to be on a safer side
40% EMI Rule
Never go beyond 40℅ of your income into EMIs.
Let’s 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.
Life Insurance Rule
Always have Sum Assured as 20 times annual Income
20X Annual Income
Let’s say you earn 100K annually, you should at least have 2M insurance by following this rule
Rule of 144
Number of years it takes to double your money at a given rate when investment is done via SIP.
For example, If the rate is 15% then sip corpus will double in 144/15= 9.6 years.
Revolving Credit Formula
The Formule: (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, youth and old. Hope you will find them simple, useful and handy. Our guidelines are intended to serve as a starting point and help readers to take meaningful decision on personal finance. It is important to evaluate your situation and adjust these guidelines as necessary.