Financial thumb rules are simple, easy-to-remember guidelines that can help you make quick calculations and decisions about your finances. Here are some of the most popular ones:
1. The Rule of 72
The Rule of 72 is a quick way to estimate how long it will take for an investment to double in value, given a fixed annual rate of return. To use it, divide 72 by the annual interest rate. For example, if your investment earns an 8% annual return, it will take approximately 9 years (72/8) for your money to double.
2. The Rule of 114
Similar to the Rule of 72, the Rule of 114 helps you estimate how long it will take for an investment to triple in value. Simply divide 114 by the annual interest rate. For instance, at a 6% annual return, it will take about 19 years (114/6) for your investment to triple.
3. The 50/30/20 Rule
The 50/30/20 rule is a budgeting guideline that helps you allocate your after-tax income into three categories:
- 50% for Needs: Essential expenses such as housing, utilities, groceries, and transportation.
- 30% for Wants: Non-essential expenses like dining out, entertainment, and hobbies.
- 20% for Savings: Savings, investments, and debt repayment
This rule can help you maintain a balanced budget and ensure you’re saving enough for the future while still enjoying your present.
4. The Rule of 144
The Rule of 144 is used to estimate how long it will take for an investment to quadruple in value. Divide 144 by the annual interest rate. For example, with a 6% annual return, it will take about 24 years (144/6) for your investment to grow fourfold.
5. The 20/4/10 Rule for Car Buying
When purchasing a car, follow the 20/4/10 rule
- 20% Down Payment: Put down at least 20% of the car’s purchase price.
- 4-Year Loan: Finance the car for no more than four years.
- 10% of Income: Ensure that your total transportation costs (including car payments, insurance, and maintenance) do not exceed 10% of your gross income.
6. The 3% Rule for Investment Withdrawals
In retirement, aim to withdraw no more than 3% of your investment portfolio annually. This rule helps ensure that your savings last throughout your retirement years.
7. The 120 – age rule for stocks
When investing, bonds are generally less risky than stocks. So the rule follows that the older you get, the less you should invest in stocks. To put a number on it, subtract your age from 120 that’s the percentage of your portfolio that should be invested in stocks.
It gives you a general idea of what your asset allocation should look like, based on your age.
8. 20X Term insurance
Now, let us now discuss the “20x term insurance rule.” Life insurance isn’t something we like to think about, yet it’s an essential component of a sound financial strategy. Assume you are the breadwinner in your household and earn Rs 5 lakh per year. According to the 20x rule, you should consider purchasing a life insurance policy that pays out Rs 1 crore in the event of the unthinkable. Why one crore rupees? It’s as simple as Rs 5 lakh x 20.
9. Rule of 70
Another excellent rule for planning your money is the rule of 70 – a secret weapon against the hidden threat to your wealth, i.e., inflation. Inflation erodes the value of your money over the period of time.
Now, here’s the secret. The rule of 70 helps you determine as to when your money will lose half its purchasing power. If the inflation rate is 6%, you need to just divide 70 by that percentage (6). The result, 11.67, tells you that your money’s purchasing power will cut in half due to inflation in roughly 11.67 years to come.
Knowing this, you can make clever choices with your investments to stay ahead of inflation’s game and make sure your money keeps its value over time.
Conclusion
These financial thumb rules are valuable tools for making quick and informed decisions about your investments and budgeting. While they provide useful estimates, it’s important to remember that they are simplifications and may not account for all variables in real-life scenarios. Always consider consulting with a financial advisor for personalized advice.