The first aid kit of personal finance

Essential Guidelines for Successful Financial Planning for You and Your Family

Similar to having a medical first aid kit handy for emergencies, there's a set of basic rules for managing your money effectively. But unlike the first aid kit for physical health, this financial toolkit is all about planning, not just reacting to crises. Its main goal is to kickstart your journey towards better managing your wealth.

Here we open the first aid box of personal finance:

Rule of 72, 114, and 144: Doubling, Tripling, and Quadrupling Your Money

Rule of 72: This rule helps you estimate how long it will take to double your money at a given interest rate. Simply divide 72 by the interest rate to find the number of years required. For example, with an 8% interest rate, it would take 9 years to double your money.

Rule 114: Similar to Rule 72, this rule calculates the time needed to triple your money. Divide 114 by the interest rate to get the number of years. For instance, at a 12% interest rate, it would take 9.5 years to triple your investment.

Rule of 144: This rule helps you determine the time required to quadruple your money. Divide 144 by the interest rate to find the number of years needed. At a 12% interest rate, it would take 12 years to quadruple your investment.

Rule of 70: Dealing with Inflation

To understand how fast your investment's value will decrease due to inflation, divide 70 by the current inflation rate. For example, if inflation is at 7%, your money's value will halve in about 10 years.

4% Rule for Financial Freedom

This rule is about achieving financial independence. To calculate the corpus required for retirement, multiply your annual expenses by 25. For example, if your annual expenses are 5,00,000, you'll need 1.25 crore for retirement. Allocate 50% to fixed income and 50% to equity and withdraw 4% annually, which is 5 lakh. This rule works for 96% of the time in a 30-year period.

100 Minus Your Age Rule: Asset Allocation

This rule helps determine the asset allocation in your portfolio. Subtract your age from 100 to decide how much of your portfolio should be allocated to equities. For example, if you're 30, allocate 70% to equities and 30% to debt, and if you're 60, go for 40% equities and 60% debt.

10-5-3 Rule: Reasonable Returns Expectations

Set realistic return expectations for your investments: 10% for equities or mutual funds, 5% for debts (like fixed deposits), and 3% for savings accounts.

50-30-20 Rule: Income Allocation

Divide your income into three categories: 50% for needs (e.g., groceries, rent, EMI), 30% for wants (entertainment, vacations), and 20% for savings (equity, mutual funds, debt). Strive to save at least 20% of your income.

3X Emergency Rule: Building Emergency Funds

Always keep at least three times your monthly income in an emergency fund to cover unexpected expenses like job loss or medical emergencies. You can aim for six times your monthly income for added security.

40% EMI Rule: Managing Loan Payments

Ensure that your total monthly EMIs do not exceed 40% of your monthly income. For instance, if you earn 50,000 per month, limit your EMIs to 20,000.

Life Insurance Rule: Protecting Your Loved Ones

Secure your family's financial future with life insurance. Aim for a sum assured that is 20 times your annual income. For example, if you earn 5 lakhs annually, your insurance should be at least 1 crore.

70-20-10 Rule for Equity Investing

When investing in equities, consider allocating 70% to Large-Cap stocks, 20% to Mid-Cap stocks, and 10% to Small-Cap stocks.

Disclaimer: The article is for informational purposes only and not investment advice.