Personal Finance : Must Know Rules


Managing personal finances is an essential life skill. To make informed decisions, it's helpful to follow simple, time-tested rules that serve as guidelines for financial planning, saving, and investing. Here are nine key personal finance rules you should know to secure your financial future:


1. Rule of 72 (Double Your Money)

The Rule of 72 is a quick way to estimate how long it will take for your money to double with a fixed annual rate of return.

  • Formula: 72 ÷ Interest Rate = Years to Double
  • Example: If your investment earns 8% annually, your money will double in 72 ÷ 8 = 9 years.

This rule emphasizes the importance of starting early to harness the power of compounding returns.


2. Rule of 70 (Inflation Impact)

The Rule of 70 estimates how many years it will take for the purchasing power of your money to halve due to inflation.

  • Formula: 70 ÷ Inflation Rate = Years to Halve Value
  • Example: With a 5% annual inflation rate, ₹1,00,000 will only be worth ₹50,000 in 70 ÷ 5 = 14 years.

This rule highlights why you should invest in assets that provide returns higher than inflation.


3. 4% Withdrawal Rule

This rule helps retirees plan sustainable withdrawals from their retirement savings.

  • It suggests you can withdraw 4% of your portfolio annually to ensure your savings last for 30 years.
  • Example: If your retirement portfolio is ₹1 crore, you can withdraw ₹4,00,000 annually.

This rule assumes a balanced portfolio of stocks and bonds and reinforces the need to save aggressively for retirement.


4. 100 Minus Age Rule (Investment Allocation)

The 100 Minus Age Rule helps determine how much of your portfolio should be invested in equities (stocks).

  • Formula: 100 – Your Age = % in Equities
  • Example: If you’re 35 years old, allocate 65% (100 – 35) to equities and the remaining to safer assets like bonds or fixed deposits.

This rule helps you balance growth and risk based on your stage of life.


5. 10-5-3 Rule (Expected Returns)

The 10-5-3 Rule sets realistic expectations for investment returns:

  • 10% return from equities.
  • 5% return from fixed-income instruments.
  • 3% return from savings accounts.

This rule encourages diversification and realistic goal-setting in financial planning.


6. 50-30-20 Rule (Budgeting)

This budgeting rule helps manage your income efficiently by dividing it into three categories:

  • 50% for Needs (essentials like rent, groceries, utilities).
  • 30% for Wants (entertainment, dining out, hobbies).
  • 20% for Savings and Investments.

It ensures a balanced approach to spending and consistent saving for the future.


7. 3X Emergency Rule

The 3X Emergency Rule advises maintaining an emergency fund equal to at least three months’ worth of expenses.

  • Example: If your monthly expenses are ₹50,000, you should have ₹1,50,000 as an emergency fund.

For higher financial security, you may extend this to 6X or 12X, especially if you have dependents or unpredictable income.


8. 40% EMI Rule

This rule ensures that your debt doesn’t overwhelm your finances.

  • Your Equated Monthly Installments (EMIs) should not exceed 40% of your monthly income.
  • Example: If your monthly income is ₹1,00,000, keep your total EMIs below ₹40,000.

This rule protects against over-leveraging and ensures financial stability.


9. Life Insurance Rule

The life insurance rule suggests your coverage should be at least 10–15 times your annual income.

  • Example: If your annual income is ₹10,00,000, aim for life insurance coverage of ₹1 crore to ₹1.5 crore.

This ensures your family’s financial security in your absence, covering expenses and liabilities.


Conclusion

These nine rules are simple yet powerful tools to help you make better financial decisions. By incorporating them into your financial planning, you can build wealth, prepare for uncertainties, and achieve your financial goals'.


What’s your favorite personal finance rule, and how has it impacted your life? Let’s discuss and grow together!

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