introduction:
- In the vast landscape of personal finance, there exists a treasure of thumb rules—simple yet powerful guidelines when applied, can pave the way for smarter financial decisions. These rules serve as guiding stars, illuminating the path toward financial well-being and prosperity.
- In this exploration, we delve into some of the most crucial and time-tested rules that can enhance our understanding of personal finance and empower us to make sounder choices with our money. In this article, we uncover the wisdom behind these essential rules and learn how to wield them effectively in real-world scenarios to bolster our financial wealth.
Escape the Credit Card Trap:
- In today's consumer culture, purchasing items on credit has become a commonplace practice. It's almost a rite of passage; as soon as many of us secure a job, applying for a credit card often tops our to-do list. And who can blame us? The allure of enticing offers from credit card companies can be irresistible.
- Everything seems smooth sailing as long as payments are made on time. However, the moment a payment is missed, the tranquil waters turn turbulent. The once seemingly benign interest rates now skyrocket, threatening to capsize our financial stability.
- Avoiding the temptation of credit can safeguard us from escalating debt.
Rule of 72:
- The Rule of 72 serves as a handy tool in the arsenal of every investor eager to multiply their wealth. Essentially, it offers a simple yet powerful insight into the time it takes for an investment to double in value based on a fixed annual rate of return.
- Here's how it works: Divide 72 by the annual rate of return on your investment, and the result will approximate the number of years it takes for your investment to double.
- For instance, let's say you invest 1,000 at an annual rate of return of 8%. Using the Rule of 72, divide 72 by 8, and you'll find that your investment will double (2000) in approximately 9 years.
Buying a vehicle The 20/4/10 rule:
- When buying a car, you should put down at least 20%, keep your car loan limited to no more than four years (to avoid interest), and spend no more than 10% of your gross income on transportation costs.
Rule of 70:
- The Rule of 70 offers valuable insight into understanding the impact of inflation on the value of our investments. It provides a quick estimate of the time it takes for the purchasing power of our money to decrease by half.
- Here's how it works: Divide 70 by the current inflation rate, and the result will approximate the number of years it takes for the value of our money to halve.
- For instance, suppose the inflation rate in your country is 5% per year. Using the Rule of 70, divide 70 by 5, and you'll find that the purchasing power of your money will halve in approximately 14 years.
50-30-20 Rule:
- The 50-30-20 rule serves as a practical guideline for managing one's finances, emphasizing the importance of saving and investing for long-term financial security.
- 50% for Essentials: Allocate 50% of your income for essential expenses such as rent or mortgage payments, utilities, groceries, and transportation.
- 30% for Lifestyle Choices: Reserve 30% of your income for discretionary spending on lifestyle choices like dining out, entertainment, travel, and other non-essential expenses.
- 20% for Savings and Investments: Dedicate 20% of your income towards savings and investments for your future financial goals.
Stock Allocation Rule:
- The Stock Allocation Rule provides a straightforward guideline for determining how much of your investment portfolio should be allocated to equities, based on your age. It suggests a more aggressive approach for younger investors and a more conservative stance for older individuals.
- Here's how it works: Subtract your age from 100, and the resulting percentage indicates the portion of your portfolio that can be allocated to stocks or equity investments. The idea is that younger individuals have a longer investment horizon and can afford to take on more risk, while older individuals may prioritize capital preservation over higher returns.
- For example, if you're 30 years old, you would subtract 30 from 100, resulting in 70. This suggests that approximately 70% of your investment portfolio could be allocated to equities.
3X Emergency Rule:
- Keeping in mind the untoward incidents of the future, people should always put at least 3 times their monthly income in Emergency funds in case of exigency caused by loss of employment, medical emergency, etc.
6 X Monthly Income:
- To be on the safer side of things, people should set aside six times their monthly?income in liquid or near-liquid assets to ensure income stability and non-dependency on other sources.
40℅ EMI Rule:
- The 40% EMI Rule stands as a pillar of financial prudence, advising individuals to limit their monthly EMI payments to no more than 40% of their income. This rule serves as a safeguard against overextending oneself financially, ensuring that a significant portion of income remains available for other essential expenses and savings.
- some advocate for an even more conservative approach. They suggest paying a substantial upfront amount, covering up to 70% of the total purchase price, and then opting for EMI for the remaining balance.
If you've made it this far, kudos to you for your dedication to mastering your finances. Don't miss out on future insights and valuable tips to enhance your financial well-being. Subscribe to our newsletter today and stay informed about the latest developments in personal finance.
