9 Personal Finance Rules | Finance Rules Everyone Should Know | Lab Of Rich

9 Personal Finance Rules

In this blog, I will share 9 Personal Finance Rules with you which are important for you if you want to take charge of your money.

Rule Number 1: The Rule Of 72

It is a fundamental rule but a very useful rule. In how many years will your money double? You have to divide 72 by the rate of interest you earn every year.

Let's say. you get an interest of 10%, then your money will double in 7 years, which is 72 divided by 10. If you have invested in an FD, then as per 5%, your money will double in 14 years. If you are earning 20%, doing whatever investments that you are doing, then your money will double in 3.5 years only.

Rule of 72: In how much time does your money double?

Rule Number 2: The Inflation Adjustment Rule, Called The Rule Of 70.

If you want to know in how many years the value of your money will decrease, then you can divide 70 by the inflation rate.

Nowadays, the inflation rate is around 5-6%, let's take it as 6%. This means, 72 divided by 6, which is 12, so your money will reduce to half in 12 years. If you have Rs 100 with you and you keep it with yourself only, then after 12 years, with that Rs 100, you will be able to buy things worth Rs 50 only as of today's price.

This tells you the importance of continuously keeping saving and also beating inflation.

Rule Number 3: The 4% Withdrawal Rule.

A lot of people ask me, 'When you invest, then how and when do you withdraw money, how much do you withdraw?' And there comes this 4% rule.

First, multiply all your yearly needs, and your expenses by 25, to figure out how much money you would need at the time of retirement because that is approximately the time you will live after retirement.

Suppose your annual expense is Rs 5 lakhs, and you retire at the age of 50 or 60, then you would need Rs 1.25 crores at that age, which is Rs 5 lakhs multiplied by 25. When you retire with this corpus, then you will withdraw 4% every year, which is the amount that you need to live life.

So you keep withdrawing 4% every year. Hopefully, your Rs 1.25 crores will still keep growing, in whatever investments you have made.

It could be debt, equity, or a combination of both, but basically what you have to do is, every year after retirement, start withdrawing 4% of your total corpus, while the corpus keeps earning interest.

Rule Number 4: The 100 Minus Age Rule.

It tells you how much you should invest in equities. Whatever is your age, subtract it from 100, and whatever number you get, that in percentage is how much you should allocate to equities.

Suppose you are 25 years old, 100 minus 25 is 75%. This means you should invest 75% of all the money that you invest every month in equities. It could be direct stocks, mutual funds, small cases, or combinations thereof. But 75% of your investment amount should go to equities. 

You can then split the remaining 25% into multiple other assets. You can buy digital gold, and corporate bonds, you can invest some in crypto too, and you can park some of it for your emergency fund too.

By the way, investing in FD for an emergency fund is the right decision. Not to grow, but to protect money. So the 100 minus age rule will tell you how much of your investments should go towards equities.

Rule Number 5: The 10-5-3 Rule.

It is a very simple rule for you to have reasonable expectations with the growing percentage of your investments post-tax.

10% means, assume that your equity investments will give you an annual return of 10% post-tax.

5% is your fixed deposit post-tax return.

3% is the savings rate that you get from your bank annually, where your money is rotting.

10-5-3.

It is very important because a lot of people chase short-term returns, and forget that you earn the same reasonable return every year on a long-term investment with great difficulty.

So even if you get 10% annually, then your money is doubling every 7 years, which means for you to actually multiply your money by say 16 times, all you need to do is just stay invested for around 30 years.

That is not a really long time, but your money will grow from 2 to 4, 4 to 8, and 8 to 16 in just 28 years, if you keep growing your money by 10% every year. Be reasonable around the expectations that you can get, because that will then allow you to stay invested. If in any year you get 20% or 25%, but the next year you get only 15%, that doesn't mean that you are doing poorly, because trust me, even the best investors across the world consistently deliver 15-20%, not more than that.

Rule Number 6: The 50:30:20 Rule.

It is a very powerful budgeting rule. If you do not know how to spend your monthly income, then 50% of your money should go towards your needs.

It could be your EMI, rent, food, and clothing expenses. All those things which are necessary for you to live life should be within 50%. Then 30% goes towards your desires. It could be a phone, vacation, EMI for your car, whatever is it that you wish to spend money on, because what fun is it if we just keep investing, and then we have money only when we are old, and we could not do anything in our youth.

So you have to spend money, spend it wisely, and that is why 30%. And 20%, a minimum of 20% should be invested every month. So, 50% towards your needs, 30% towards your wants, and 20% towards your investments.

Rule Number 7: The Six X Rule.

Before starting any kind of investment, you should have at least 6 months of expenses in your emergency fund. If you do not have it, then you are actually taking a big risk.

In addition to this, I will add two more things.

Health insurance and life insurance.

• Health insurance, because God forbid if anything happens to you or your family members, then all your savings can vanish by paying hospital bills.
• And life insurance, because God forbid if anything happens to you or your main earning member, then all the burden of your loans should not be borne by your family. So in the unfortunate event of you passing away, you should leave your family with financial protection for which life insurance is important.

But beyond that, the six X rule, which is to multiply the monthly expense for your needs by 6,

This should be your emergency fund. And you can split this emergency fund in what is called 70:20:10.

70% will be in a fixed deposit, which is secure there.

20% in your savings account, from which you can withdraw at any time.

And 10% in cash, so that in case of any immediate need, you can withdraw that money or at least tap into that money, because it is lying somewhere in your drawer or cupboard.

Rule Number 8: The 40% Rule.

The 40% rule tells you that if you have any ongoing loan EMIs, then the total of all the loan EMIs should be within 40% of your salary. If more than 40% of your salary is going towards loan EMI,

then you are over-leverage.

This means, you have more loans than you need, and that is going to suck you in because all your savings are vanishing by paying the interest on those loans, and you are not getting a chance to invest according to the 50:30:20 rule, because you have to live your life, you have to fulfil your desires, and then you are not left with any money to invest.

So the longest time you spend on paying the loan is the time you are away from investing, and because of that, you are delaying your investments even more, and you are not going to retire with the money that you need to retire with.

And Finally Rule Number 9: The 25 X Rule.

It tells you that whenever you buy life insurance, then you should multiply your annual income by 25, and that should be your ideal life insurance cover.

So, if your annual income is Rs 5 lakhs, then you should take a life cover of Rs 1.25 crores, so that god forbid if anything happens to you, your family will get Rs 1.25 crores, which would be enough for them to manage themselves for the next 25 years if they invest properly. If nothing happens to you and the term ends, then you would get the premium paid, and basis the amount that you have chosen, whether it is a capital guaranteed plan, endowment plan, any investment plan, ULIP, etc.,

Whatever the choice is that you have made, you will get a return according to that, but the life insurance cover bare minimum should be 25 times your annual income.

Summary

So these were the 9 personal finance rules which are important for you to take charge of your money.

1. The rule of 72, will tell you how many years your money will double.
2. The rule of 70, will tell you how much the value of your money will reduce because of inflation.
3. The 4% withdrawal rule tells you how much money you should withdraw from investments after retirement.
4. The hundred minus age rule tells you how much you should invest in your equity according to your age.
5. The 10-5-3 rule will tell you how much you can reasonably expect post-tax from your returns.
6. The 50:30:20 rule will tell you how to split your money into your needs, your wants, and your investments.
7. The six X rule will tell you the size of an emergency fund.
8. The 40% rule will tell you how many EMIs you should have.
9. And finally, the 25X rule will tell you how much should be your life insurance cover.