Below are 8 important Personal Finance Rules which should be known by everyone.
Personal Finance Rules
The 9 rules are Rule of 72, Rule of 114, Rule of 144, Rule of 70, 50-30-20 Rule, 3X Emergency Rule, 40℅ EMI Rule, Health Insurance Rule and Life Insurance Rule.
Rule of 72
Rule of 72 (Double Your Money) it is Number of years required to double your money at a given rate, you just divide 72 by interest rate.
Example: If you want to know how long it will take to double your money at 9% interest, divide 72 by 9 and get 8 years
At 6% rate, it will take 12 years
At 8% rate, it will take 9 years
Rule of 70
Rule of 70 (Inflation) – Divide 70 by the current inflation rate to know how fast the value of your investment will get reduced to half its present value.
Example: The inflation rate of 7% will reduce the value of your money to half in 10 years.
50-30-20 Rule: Allocation – Divide your income into
50% – Needs – Groceries, rent, EMI
30% – Wants – Entertainment, vacations, etc.,
20% – Savings – Equity, MFs, Debt, FD, etc.,
At least try to save 20% of your income.
Rule of 114
Rule of 114 (Triple) – It is number of years required to triple your money at a given rate, you just divide 114 by interest rate.
For example, if you want to know how long it will take to triple your money at 12% interest, divide 114 by 12 and get 9.5 years.
At 8% interest rate, it will take 14.25 years.
Rule of 144
Rule of 144 (Quadruple) – It is number of years required to, quadruple your money at a given rate, you just divide 144 by interest rate.
For example, if you want to know how long it will take to quadruple your money at 12% interest, divide 144 by 12 and get 12 years.
At a 8% interest rate, it will take 18 years.
3X Emergency Rule
Always put at least 3 times of your monthly income in Emergency funds for emergencies purposes such as loss of employment, medical emergency, etc.,
You can have around 6 X Monthly Income to be on a safer side.
For Example: Monthly income is 80000, then its better to have 6 * 80000 = 480000 for Emergency purposes.
You can keep this in Fixed Deposits, Liquid Funds, etc.,
40% EMI Rule
Never go beyond 40% of your income into EMIs.
Say you earn, 50,000 per month. So you should not have EMIs of more than 20,000.
This Rule is generally used by Finance companies to provide loans. You can use it to manage your finances.
Life Insurance Rule
Always have Sum Assured as 20 times of your Annual Income.
Example: If your annual income is 10,00,000 then its better to get insured for atleast 20x. Life Insurance is must for everyone.
Health Insurance Rule
Always have Sum Assured as Minimum 2 times of your Annual Income.
Even if your employer provides you Health Insurance, its always better to have own health insurance.