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Personal finance, as the term suggests, is a highly personal and unique aspect of one’s life. The personal finances of no two people are identical. Despite this unique nature, several popular rules of thumb have been established in the realm of personal finance management. These thumb rules address different aspects of personal finance. If the rule of 72<\/strong> guides us in investments, the 4% withdrawal rule helps us manage our pension fund.<\/p>\n\n\n\n Even if it is not possible to follow these thumb rules to the T, they serve as useful benchmarks. We can use them to build our personal finance strategies around these rules. Let us look at some of the popular personal finance rules that you can implement in your everyday life.<\/p>\n\n\n\n Doubling your investment always sounds enticing. The rule of 72 in finance<\/strong> is quite helpful in calculating this.<\/p>\n\n\n\n So, what is the rule of 72<\/strong>? It is a simple formula for calculating when and how to double your money<\/strong>. To use the rule of 72 formula<\/strong>, you only need the amount of investment and the expected rate of return on it. <\/p>\n\n\n\n According to the rule of 72 formula<\/strong>, years to double an investment = 72\/annual rate of return.<\/p>\n\n\n\n For example, let us calculate the years required to double Rs. 1000 at an expected rate of return of 9%. Calculate this in an online calculator, and you are likely to get an answer of 8 years and 14 days approximately. Now, let us look at the answer using the rule 72 investing<\/strong> formula.<\/p>\n\n\n\n Years to double an investment = 72\/annual rate of return = 72\/9 = 8 years.<\/p>\n\n\n\n Thus, the answer, as calculated mathematically and according to the rule of 72<\/strong>, is approximately the same, i.e., 8 years. Additionally, you must consider other factors, such as taxes and fees.<\/p>\n\n\n\n The 50-30-20 rule<\/strong><\/p>\n\n\n\n This thumb rule is handy when it comes to budgeting your financial expenses for a period.<\/p>\n\n\n\n It serves as a good reference point for beginners who want to implement budgeting for their monthly income and expenses. However, it may not be possible to stick to it entirely. For instance, high rent in cities may mean that needs exceed 50% of income.<\/p>\n\n\n\n Moving on to the smart use of retirement corpus. There is a risk that unchecked withdrawal may lead to premature emptying of the corpus. The 4% withdrawal rule says that the maximum annual withdrawal should not exceed 4% of the total retirement corpus as on day one.<\/p>\n\n\n\n The idea behind it is that the average post-retirement life span of a person is around 25 to 30 years.<\/p>\n\n\n\n A major threat to this rule is, of course, inflation. Therefore, the remaining 96% of the corpus must be invested to beat the inflation rate at the very least.<\/p>\n\n\n\n There is a personal finance thumb rule for facing emergencies as well. The 3X emergency corpus rule elucidates the importance of the rainy-day fund. The X here being your monthly expenditure, you should have at least 3 times the same in your emergency corpus.<\/p>\n\n\n\n This rule, too, is subjective, and one may argue that having 6X or 10X would be a safer approach. In a real-world scenario, an emergency corpus may be needed in the event of a job loss, for instance. You may accordingly choose to maintain the fund for that many months, as it could possibly take you to get a new job.<\/p>\n\n\n\n This rule is related to investment decisions. As we all know, equity investments are not fully risk-free. A high equity exposure at an old age can be a very risky proposition. This is because the equity market in most countries delivers long-term growth with short-term volatility.<\/p>\n\n\n\n Therefore, a long-term investment is more likely to deliver high growth. However, a short-term exposure may not have sufficient time to recover from an ongoing slowdown in the market.<\/p>\n\n\n\n Coming to the rule, it simply states that your equity allocation should be 100 minus your age. Thus, if you are 40, your equity allocation can be 60%. But if you are 70 years old, your equity exposure should not exceed 30%.<\/p>\n\n\n\n If you are planning to implement any or all of these rules, here are a few key takeaways for you.<\/p>\n\n\n\nRule of 72<\/strong><\/h2>\n\n\n\n
What does the 50-30-20 rule say?<\/strong><\/h2>\n\n\n\n
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4% withdrawal rule<\/strong><\/h2>\n\n\n\n
3X emergency corpus rule<\/strong><\/h2>\n\n\n\n
100-minus-age rule<\/strong><\/h2>\n\n\n\n
Concluding thoughts on personal finance rules<\/strong><\/h2>\n\n\n\n
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