Here are some personal finance rules that everyone should follow to regulate and control their personal finances.
The term “personal finance” has become a buzzword these days, with many people using it frequently in relation to their individual or family’s expenses and savings. Personal finance refers to shrewd management of finances like budgeting, saving and spending monetary assets and wealth of a person or family, considering several financial risks and future events . Millennials, in particular, need to watch their finances in order to thrive in a world of competition and uncertainty.
Some personal finance rules that everyone should follow to regulate and control their personal finances are:-
Use the rule of 72 to find out the time period needed to double your income
Everyone wants to double their income and increase their savings. In order to find out the number of years it takes to double your money, you need to divide the number 72 by the annual interest rate. For example, if you want to know how long it will take you to double your money at 8% interest, you would divide 72 by 8 to get 9 years. Similarly, at a rate of 6%, it will take 12 years and at a rate of 9%, it will take 8 years. This will help people to estimate the time it will take to see their salary double and prepare their expense charts accordingly so that they don’t have to face the shortage of money.
Apply the rule of 70 to check the depreciation rate of your investment
An important aspect of personal finance is to monitor the amortization value of your investment so that you can decide whether it is profitable or not. You can divide 70 by the current rate of inflation to calculate how quickly the value of your investment will shrink to half of its current value. It will help you understand whether an investment is an asset or a liability. For example, an inflation rate of 7% will halve the value of your money in 10 years.
Invest 50% of income in fixed income securities and 50% in stocks
To manage your personal finances, it is essential to divide your income into two parts so that you do not indulge in debauchery and unnecessary spending. You must invest 50% of your salary in fixed income securities and 50% in equities, which will segregate your income. Now withdraw 4% from your bank on an annual basis. This rule works 96% of the time over a 30 year period.
Stock allocation rule – 100 minus your age rule
Asset allocation is based on this principle. This rule states that people must own a percentage of shares equal to 100 minus their age. So subtract your age from 100 to find out how much of your portfolio should be allocated to stocks.
Suppose your age is 30 (100 – 30 = 70)
But if your age is 60 then (100 – 60 = 40)
Asset Allocation Rule – 10-5-3 Rule
The asset allocation or 10-5-3 rule indicates that the annual return on equities is likely to be 10%, the rate of return on bonds is 5%, and cash (and cash-equivalent liquid investments) cash) are 3%. It is therefore advisable to have reasonable return expectations on stocks.
10℅ Rate of Return – Stocks / Mutual Funds
5℅ – Debts (fixed deposits or other debt securities)
3℅ – Savings account
Rule 50-30-20 – on allocation of income to expenses
This rule can be applied to bifurcate your spending for different purposes and monitor so you don’t overspend and control your budgets and personal finances.
Dividing your income into three parts will help you channel its flow:-
50℅ of your income must be dedicated to your needs (groceries, rent, emi, etc.)
30℅ of your salary must be allocated to your wants and desires (entertainment, holidays, etc.)
20℅ of your remuneration must be reserved for your savings (Equity, MFs, Debt, FD, etc.).
This is not a hard and fast rule, you can definitely save more by exercising restraint when it comes to reckless spending.
3X emergency rule
Keeping in mind the unfortunate incidents in the future, people should always put at least 3 times their monthly income in emergency funds in case of emergency caused by job loss, medical emergency, etc.
3 times monthly income
To be on the safe side, people should set aside six times their monthly income in liquid or near-liquid assets to ensure income stability and non-dependence on other sources.
EMI 40℅ ruler
As many financial experts suggest, people should never cross the limit of investing 40℅ of their income in EMI. If a person earns ₹50,000 per month, they should not have an EMI above ₹20,000. This is a general rule followed by finance companies to sanction loans, but individuals can use it to manage their finances.
life insurance rule
The life insurance rule can also be used to regulate personal finances. To assess the minimum sum insured in term life insurance, the best way to calculate is 10 times the annual income, which means if your current annual salary is ₹10 lakh, you should have life insurance coverage of at least ₹1 crore.
(By Kumar Binit, Founder and CEO, FinMapp)