9 thumb rules to manage your finances in a better way

While financial needs vary from person to person, there are certain loose “rules” that apply broadly to many different situations. These tried-and-tested thumb rules can improve your financial life. You may tweak these rules while implementation, but they can be helpful for your financial health. Here are nine such thumb rules:

1) Rule of 72

The Rule of 72 talks about the number of years required to double your money at a given rate, All one has to do is 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 eight and you get nine years. So at 6% rate, it will take 12 yrs and at 9% interest rate it takes eight years.

2) Rule of 70

To know how fast the value of your investment will get reduced to half its present value, one has to divide 70 by the current inflation. Therefore, inflation rate of 7% will reduce the value of your money to half in 10 years.

3) 4% rule for financial freedom

For this rule to work the corpus should be equivalent to 25 times of your estimated Annual Expenses.

For example: If your annual expense after 50 years of age is Rs 5,00,000 and you wish to take VRS, then the corpus you require would be Rs 1.25 crores. Now, put 50% of this into fixed income & 50% into equity, and withdraw 4% every year, which is Rs 5 lakh. This rule works for 96% of the time over a 30-year period.

4) 100 minus your age rule

This rule is used for asset allocation. Subtract one’s age from 100 to find out, how much of the portfolio should be allocated to equities

Example if your Age is 30 deduct 30 from 100 you get 70, so you need to allocate 70 on equity and 30 on debt.

5) 10-5-3 rule

One should have reasonable returns expectations. For example a 10% return can be expected from equity and mutual funds, 5% from debt which is fixed deposits or other debt instruments and 3% from savings account.

6) 50-30-20 rule – about allocation of income to expense

Here one has to divide the income into three parts namely needs, wants and savings wherein 50% of the money has to be allocated to needs that could be groceries, rent and EMI, 30% has to be allotted to wants like entertainment and vacations and 20% in savings like equity, mutual funds, debt and FD.

7) 3X emergency rule

Always put at least three times your monthly income in Emergency funds for emergencies such as loss of employment, medical emergency, etc. In fact, one can have around six times of monthly income earned in liquid or near liquid assets to be on a safer side

8) 40℅ EMI rule

Never go beyond 40℅ of your income into EMIs. For example if you earn Rs 50,000 per month, your EMIs should not exceed Rs 20,000. This rule is generally used by finance companies to provide loans. But can also be used for managing one’s finances.

9) Life insurance rule

Always have sum assured as 20 times of your annual income. Say you if earn Rs 5 lakh annually, you should at least have Rs 1 crore insurance by following this rule.