Personal finance is concerned with how you manage your finances. All people want is a hack that will allow them to multiply their money exponentially. Building money is a process that requires striking a balance between investing, saving, and budgeting. It’s not like eating a two-minute instant noodle. Naturally, when it comes to personal finance, there are some general guidelines. Both people who are just starting on their financial journey and those who are already on it can follow these guidelines. These guidelines give you a general idea: no “one size fits all” funda exists.
Everyone may implement nine personal finance guidelines today to gain financial independence and wealth.
1) The 72-rule
The “Rule of 72” calculates how long it will take to double your investment in a specific financial instrument. To find out how long it would take to double your investments, divide the rate of return by 72.
The Rule of 72 may apply to anything that grows at a compound rate, such as the population, macroeconomic data, charges, or debts, according to Ashish Aggarwal, MD, Acube Ventures. If the GDP grows at the current pace of 4% annually, the economy is expected to double in 72 / 4% = 18 years.
The long-term effects of these fees on the fee that lowers investment gains can be shown using the Rule of 72. In around 24 years, the investment principal of a mutual fund with an annual expense fee of 3% will be slashed in half. According to Ashish Aggarwal, a borrower who pays 12% interest on a credit card (or any other kind of loan with compound interest) will owe twice as much after six years.
2) The 100-Age Rule
The underlying idea of age-based asset allocation is that you should be less exposed to investing risk as you get older. Since these investments have a better return at a higher risk, it is sometimes referred to as the percentage of equity in your portfolio.
Let’s say you are forty years old. Investing in equities may make up 60% of your portfolio, with debt funds and fixed-income instruments making up the remaining 40%. However, once you are sixty, the ratio will be reversed, with 40% invested in equity and the remaining 60% in debt.
3) The 50-30-20 Rule
Among the most popular and easily understood budgeting techniques is the 50-30-20 Rule. According to the guideline, an individual’s take-home pay should be split into three categories: needs (50%), wants (30%), and savings (20%). The simplicity of the Rule is in how simple it is to understand and implement, allowing everyone to set away a certain percentage of their monthly income for savings. According to the guidelines, individuals should monitor their expenditures, especially if they struggle to save money at the end of the month, according to Agam Gupta, Executive Director of Share India FinCap.
4) The First Week Rule
Personal financial gurus recommend saving and investing the 20% of your income that is set aside for savings within the first week of investing to help you develop discipline in your investing.
Impulsive purchases are one of the worst things you can do to your finances. For compulsive buyers, try waiting a week before buying anything new and shiny, even if it catches your eye. This gives you additional time to weigh your options. What is the estimated value of this purchase? What is the return on investment? What is reselling worth? Is there a more advantageous use for this money? If a week has passed and you’re still passionate about the purchase, then go ahead and buy it. But chances are, after closely inspecting it, you’ll determine you don’t actually need it, which will save you money,” stated Agam Gupta, Executive Director, Share India FinCap.
5) The 40% Rule of EMI
Simple math makes up the 40% EMI rule. Make sure that the total amount of your monthly installment loan is at most forty percent of your income.
“Debt is a cunning thing. They gradually eat away at your revenue until you are left with very little. The 40% EMI guideline is an easy approach to keep them in check. This reduces your stress levels and helps you keep your bills in check,” said Ashish Aggarwal, MD, Acube Ventures.
6) Insurance with 20X Term
The best method to determine the minimum sum assured in term life insurance is to multiply your annual income by twenty. For example, if your current yearly salary is ₹24 lakh, you should have a life insurance policy that covers at least ₹4 crore 80 lakh.
7) 6X Emergency Fund
People should always set aside at least six times their monthly income in emergency reserves in case of unforeseen circumstances such as job loss, a medical emergency, etc.
For example, if your monthly costs come to ₹2 lakh, you should set aside ₹12 lakh in your bank account to cover unforeseen events.
8) The Two-Time Savings Rule
The returns on your savings account will be pitiful. Speaking with your bank and setting up your savings account’s “Auto-Sweep” feature is advisable.
How is the auto sweep function operated? One strategy to maximize the amount of money in your savings account is to use the auto sweep feature. Your excess funds are automatically transferred to a fixed deposit account with greater interest rates when your account balance exceeds a predetermined threshold. In other words, it gives you FD-like earnings on savings accounts, increasing your yield to 5–7%.
9) Retirement Rule 25X
The general guideline for retirement savings is known as the “rule of 25X,” which states that you should save 25 times your annual income.
According to this concept, people can consider retiring when their assets are 25 times more than their yearly costs. Therefore, you can consider retiring if you have a corpus of ₹6 crore and your annual expenses are ₹24 lakh.
