The Buyt Desk
Saving and investing need a well-formulated plan. By making a monthly budget you can keep a track of all your expenses and also know how much you save every month. While making a budget you must consider factors like liability, cash flow, and your financial goals. Nowadays there are many apps that can help you or you can simply take a pen paper and jot down your expenses. There are a few thumb rules of money that can help you in gauging your budget. These are basically calculations that help you have a better look at your financial goals.
Rule of 72 – This rule is used to calculate the time period required to double your savings. The math is simple, just divide 72 by the annual interest rate offered for your savings. The result is the number of years taken to double your money at that interest rate. This will give you a fair idea about how much you will be having in the next 10-12 years and if these savings is enough. For example, if you have deposited x amount of money at 5% interest then it will take 14.4 (72/5) years to become double.
Rule of 70 – This rule is used to evaluate the depreciation rate of your investment. Not every investment you make is profitable in the long run. Some depreciate and it can become a liability. To know how early the value of your investment is reduced to half, divide 70 by the current inflation rate. For example, if the current inflation rate is 5%, then in the next 14 years your investment value will be reduced to half.
Rule to invest 50% of income into fixed income & 50% into equity – Avoid engaging in extravagance and unnecessary expenditure. Divide your income into two equal parts and put one share into fixed income and another into equity.
The rule for Stock Allocation – The allocation of assets should be done based on this rule. It says that one should have a percentage of the portfolio into Equity which is equal to 100 minus their age. For example: If you are 28 years old, then your portfolio segregation should be such that 72% should be equity and 28% debt.
The rule for Asset Allocation Rule – This is also known as the 10-5-3 rule. It states that the likelihood of annual return, 10% for stocks, 5% for bonds and 3% for liquid cash deposits. This is an ideal expectation.
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10℅ Rate of return – Equity / Mutual Funds
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5℅ Rate of return – Debts (Fixed Deposits or Other Debt instruments)
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3℅ Rate of return – Savings Account
The rule for income allocation – This rule makes sure one does not overspend and go out of budget. This is the 50-30-20 rule where 50℅ of the earnings is dedicated to statutory needs like Groceries, rent, EMI, 30℅ of the earnings is dedicated to wants and desires like Entertainment, vacations and the last 20℅ is a saving used in investments like Equity, MFs, Debt, FD. The percentage can be varied as per your plan but it is advised to not reduce the investment percentage.
Rule of 3X Emergency – The future can never be foreseen, so it is necessary that you set aside 3 months’ expenses and keep that as your go-to money. This fund can be used in case of a medical emergency or unemployment or a change of jobs.
Rule of 40℅ EMI – One should not commit to EMI that is more than 40% of income or earnings. This is a yardstick even the bank follows while approving loans.
Life Insurance Rule – The minimum sum assured in term life insurance should not be anything less than 10 times the annual earning. For example: If your current annual income is Rs.15 lakh then the sum assured should be a minimum of Rs. 1.5 crore.
Summing up
If not all, start following a few rules so that you have good financial plans to achieve your financial goals. Start young so that you can generate a good corpus. Before making any investment, just have a look at these rules and evaluate your decision. One rule doesn’t fit all, you can tweak it as per your requirements.
