Hello and welcome to today’s session on personal finance! In this article, I’ll introduce you to 10 simple yet powerful personal finance rules that can significantly aid your wealth creation journey. Don’t worry—these rules are straightforward, even if you don’t consider yourself a math whiz. They’ll not only make managing your finances easier but also impress your friends with how quick and smart your financial decisions become! Let’s dive into the magical world of personal finance and uncover these everyday principles.
Rule #1: The Rule of 72
One of the most common questions people have about investments is, “How long will it take for my money to double?” The Rule of 72 makes this calculation quick and easy. You simply divide 72 by the interest rate of your investment, and the result is the number of years it will take for your money to double.
Example: If you invest in a scheme with a 7% interest rate, divide 72 by 7, giving you approximately 10 years. This means that, at 7%, your investment will double in about a decade. This rule is most accurate for interest rates between 4% and 15%, making it ideal for moderate returns on investments like Fixed Deposits or low-risk mutual funds.
Rule #2: The 100 Minus Your Age Rule
This rule helps you decide what portion of your investments should go into equities versus other asset classes, based on your age. Subtract your age from 100, and that’s the percentage of your portfolio you should allocate to stocks.
Example: If you’re 30, you should invest 70% (100 – 30) in equities and the remaining 30% in more conservative investments like bonds or real estate. While this rule offers a general guideline, it’s crucial to consider your financial responsibilities and liabilities. If you have substantial debt or unique financial obligations, you may need to adjust your allocation accordingly.
Rule #3: The 50/30/20 Budgeting Rule
This well-known rule divides your income into three categories:
- 50% for necessities: Essential expenses like rent, utilities, groceries, and transportation.
- 30% for discretionary spending: These are the “wants”—dining out, vacations, entertainment, and so on.
- 20% for savings and investments: Use this portion to invest and save for the future.
By allocating your income this way, you ensure you’re covering essentials, enjoying some of your earnings, and steadily building wealth.
Rule #4: The 6x Emergency Fund Rule
Having an emergency fund is vital. This rule suggests keeping six months’ worth of living expenses in a liquid savings account. For instance, if your monthly expenses are ₹25,000, aim to have ₹1,50,000 in your savings account as a cushion.
An emergency fund provides financial security and peace of mind, allowing you to manage unexpected expenses or job loss without relying on credit.
Rule #5: The 20x Annual Income Insurance Rule
To determine how much life insurance you need, multiply your annual income by 20. This ensures your family is financially secure in your absence. If you earn ₹5,00,000 annually, your life insurance should be around ₹1 crore.
When choosing insurance, focus on term plans, as they offer substantial coverage at a lower cost compared to whole-life or investment-linked insurance plans.
Rule #6: The 40% EMI Rule
When it comes to taking on debt, keep your monthly EMIs (Equated Monthly Installments) within 40% of your monthly income. This ensures you’re not over-leveraging yourself with loans.
Example: If your monthly income is ₹50,000, your total EMI payments should not exceed ₹20,000. Sticking to this limit helps you manage debt responsibly and leaves room for other expenses and savings.
Rule #7: The 25x Retirement Savings Rule
If you’re planning for retirement, this rule suggests saving enough to cover 25 times your annual expenses. This strategy helps ensure you have enough capital to live comfortably off investment returns without depleting your savings.
Example: If your annual expenses are ₹10,00,000, aim to have ₹2.5 crore saved before retiring. This amount, when invested, can generate returns sufficient to meet your expenses in retirement.
Rule #8: The “10% Investment” Rule
To steadily grow wealth, aim to invest at least 10% of your income consistently. For instance, if you earn ₹50,000 monthly, set aside ₹5,000 for investments. Regular investing, even in small amounts, can grow significantly over time due to compounding returns.
This rule underscores the importance of regular investing as a habit and helps you take advantage of market growth in the long term.
Rule #9: The 70/30 Rule for Diversification
For balanced investment, consider allocating 70% to growth-focused assets (like equities) and 30% to more stable, income-generating assets (like bonds).
Example: If you have ₹1,00,000 to invest, put ₹70,000 in stocks or mutual funds and ₹30,000 in fixed-income options. This diversified approach reduces risk and helps generate steady returns.
Rule #10: The Rule of “Financial Education Over Entertainment”
Finally, prioritize learning about personal finance. The best investment you can make is in your financial knowledge. Use resources like books, courses, and reputable finance blogs.
Understanding concepts like compound interest, tax planning, and investment strategies empowers you to make informed financial decisions and achieve long-term wealth.
