Personal finance is a term that covers managing your money as well as saving and investing. It encompasses budgeting, banking, insurance, mortgages, investments, retirement planning, and tax and estate planning. The term often refers to the entire industry that provides financial services to individuals and households and advises them about financial and investment opportunities.
Personal finance is about meeting personal financial goals, whether it’s having enough for short-term financial needs, planning for retirement, or saving for your child’s college education. It all depends on your income, expenses, living requirements, and individual goals and desires—and coming up with a plan to fulfill those needs within your financial constraints. To make the most of your income and savings, it’s important to become financially literate, so you can distinguish between good and bad advice and make smart decisions.
Some of the finance Rules given below all should know:
- 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 72
No. of yrs required to double your money at a given rate, you just divide 72 by interest rate Eg, if you want to know how long it will take to double your money at 8% interest, divide 72 by 8 and get 9 yrs At 6% rate, it will take 12 yrs At 9% rate, it will take 8 yrs
Rule of 70
Divide 70 by current inflation rate to know how fast the value of your investment will get reduced to half its present value. Inflation rate of 7% will reduce the value of your money to half in 10 years.
4% Rule for Financial Freedom
Corpus Required is 25 times of your estimated Annual Expenses. Eg- if your annual expense after 50 years of age is 500,000 and you wish to take VRS, then corpus with you required is 1.25 Cr. Put 50% of this into fixed income & 50% into equity. Withdraw 4% every yr, i.e.5 lac. This rule works for 96% of time in 30 yr 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%
One should have reasonable returns expectations 10℅ Rate of return – Equity / Mutual Funds 5℅ – Debts ( Fixed Deposits or Other Debt instruments) 3℅ – Savings Account
50-30-20 Rule – about 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. You can definitely save more.
3X Emergency Rule
Always put at least 3 times your monthly income in Emergency funds for emergencies such as Loss of employment, medical emergency, etc. 3 X Monthly Income. In fact, one can have around 6 X 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. 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 of your Annual Income 20 X Annual Income. Say you earn 5 Lacs annually, you should at least have 1 crore insurance by following this Rule.
These rules are equally useful for young, youth and old. Hope you will find them simple, useful and handy.
Financial and Business expert having 30+ Years of vast experience in running successful businesses and managing finance.