Personal finance rules are guidelines that can help individuals make informed financial decisions and manage their money more effectively. Here are some of the most popular personal finance rules, along with a detailed explanation and examples:
The Rule of 100
The rule of 100 is a guideline for how much of your portfolio should be invested in Equities at any given age. The rule rests on the notion that the younger we are, the more risk we can afford to take. For example, if your age is 25 then ,generally speaking, your allocation Equity must be (100-25) 75% and the other 255 must be in some other instrument that is less risky .
The Rule of 72
This rule is a quick and easy way to calculate the time it takes for an investment to double, based on its annual rate of return. The rule of 72 states that you can divide 72 by the annual rate of return to determine the number of years it will take for an investment to double. For example, if an investment has an annual return of 8%, it will take 9 years (72 ÷ 8) for it to double.
The Rule of 70
This rule is a quick and easy way to calculate the number of years in which your savings will become half its value due to inflation. The rule of 70 states that you can divide 70 by the annual rate of inflation to determine the number of years it will take for your savings to become half in value. For example, if inflation has an annual return of 7%, it will take 10 years (70 ÷ 7) for savings to become half in value.
The Rule of 50-30-20
This rule is a simple guideline for budgeting and allocating your income. It states that you should allocate 50% of your income towards necessities, 30% towards wants, and 20% towards savings and debt repayment. For example, if your monthly income is Rs 50,000, you should spend Rs 25,000 on necessities, Rs 15,000 on wants, and Rs 10,000 on savings and debt repayment.
The Rule of 30
This rule states that your monthly EMI or House rent should be less than 30% of your monthly salary or earnings. If its not, then you should either focus on increasing your salary or consider a house with lower rent/ EMI. For example, if your monthly income is Rs 50,000, you should not spend more than Rs 15,000 on house EMI or rent.
The Rule of 6
This rule states that you should have a minimum of 6 months worth of living expenses saved in a liquid account, such as a savings account or money market fund, for unexpected expenses or emergencies. For example, if your monthly living expenses are Rs 25,000, you should aim to have a minimum of Rs 1,50,000 saved in your emergency fund.
The Rule of 4
This rule states that an individual can safely withdraw 4% of their retirement savings each year to cover living expenses in retirement, without depleting their savings too quickly. For example, if an individual has Rs 1,00,00,000 saved for retirement, they can withdraw Rs 2,00,000 per year (4% of 1,00,00,000) to cover living expenses.
In conclusion, personal finance rules can be a useful tool for individuals looking to manage their money more effectively. By following these guidelines, individuals can make informed financial decisions, prioritise saving and investing for the future, and manage debt more efficiently. It’s important to keep in mind that personal finance rules are not one-size-fits-all and that individuals should consider their personal financial circumstances when making financial decisions.
