Master Your Finances: Top 12 Investing, Savings, Personal Finance Rules And Formulas You Need to Know

Introduction

When it comes to personal finance, there are many rules and formulas to follow. From the Rule Of 72 to The 3/20/30 Rule, these rules and formulas can help you make informed decisions about savings, investing and spending.

In this blog, we will cover some of the most popular personal finance rules that can provide you with a basic starting point for managing your money. 

Note*

It is essential to note that while these rules can be helpful in providing a starting point for managing your finances but following them blindly or without adjusting it as per your need is not advisable.

Every individual's financial situation is unique and you should seek professional advice before making any significant financial decision.

With that said, let's dive in and understand these financial rules. 

Rules Covered In This Blog:

1. Rule Of 72

2. Rule Of 114

3. Rule Of 144

4. Rule Of 70

5. 50/30/20 Rule

6. 6X Rule

7. 100-X Rule

8. 4% Withdrawal Rule

9. 25X Rule

10. 40% Rule

11. 20/4/10 Rule

12. 3/20/30 Rule

1. Rule Of 72

• What is Rule Of 72? 

Rule Of 72 is a simple mathematical formula used to estimate the amount of time your investment will take to double in value when given a fixed annual interest rate. 

• The Formula Can Be Expressed As:

Number of years to double = 72 / Interest rate

For example, if an investment has an annual interest rate of 12% then the number of years your investment will take to double in value is approximately 6 years (i.e., 72 / 12 = 6).

It's worth noting that the rule is an approximation and the actual time it takes for an investment to double in value may depend on a variety of factors, such as fluctuations in the interest rate or changes in the value of the investment itself.

2. Rule Of 114

• What Is Rule Of 114? 

Rule Of 114 is another mathematical formula used to estimate the amount of time your investment will take to triple in value when given a fixed annual interest rate. 

• The Formula Can Be Expressed As:

Number of years to triple = 114 / Interest rate

For example, if an investment has an annual interest rate of 12% then the number of years your investment will take to triple in value is approximately 9.5 years (i.e., 114 / 12 = 9.5).

This rule is also an approximation and the actual time it takes for an investment to triple in value may depend on a variety of factors, such as fluctuations in the interest rate or changes in the value of the investment itself.

3. Rule Of 144

• What Is Rule Of 144? 

Rule Of 144 is another mathematical formula used to estimate the amount of time your investment will take to quadruple in value when given a fixed annual interest rate. 

• The Formula Can Be Expressed As:

Number of years to quadruple = 144 / Interest rate

For example, if an investment has an annual interest rate of 12% then the number of years your investment will take to quadruple in value is approximately 12 years (i.e., 144 / 12 = 12).

This rule is also an approximation and the actual time it takes for an investment to quadruple in value may depend on a variety of factors, such as fluctuations in the interest rate or changes in the value of the investment itself.

4. Rule Of 70

• What Is Rule Of 70? 

Rule Of 70 is a mathematical formula used to estimate the amount of time, it will take to halve (loose) the purchasing power of your money based on the inflation rate. 

• The Formula Can Be Expressed As:

Number of years to halve the purchasing power = 70 / Inflation rate

For example, if the inflation rate is 7% then the number of years your money will take to halve (loose) the purchasing power is approximately 10 years (i.e., 70/7 = 10).

This rule is an approximation and the actual time it takes to halve (loose) the purchasing power of money depends on a variety of factors, such as fluctuations in the inflation rate or not facing same inflation rate every year. 

5. 50/30/20 Rule

• What is 50/30/20 Rule? 

The 50/30/20 Rule is a popular budgeting method that helps people to allocate their income to different categories. It is a simple and effective way of creating a budget that works for you.

• Here's How The 50/30/20 Rule Works:

50% of your income should go towards essentials/needs. This includes things like utilities (water, electricity, gas, internet), groceries, medical expenses, clothing and transportation. 

30% of your income should go towards guilt free spendings/wants. This includes things like entertainment, traveling, dining out and shopping.

20% of your income should go towards savings and investing. This includes things like building an emergency fund, saving for retirement and investing.

By following this rule, you can ensure that you are spending your money in a way that aligns with your priorities and goals. 

• Let's Look At An Example Of 50/30/20 Rule:

Suppose you earn ₹50,000 per month then you would allocate your income 

₹25,000 (50%) towards essentials/needs, 

₹15,000 (30%) towards guilt free spendings/wants, 

₹10,000 (20%) towards savings and investing. 

Of course, your personal circumstances may vary and you may need to adjust the percentages to fit your needs. However, The 50/30/20 Rule will provide you a starting point for creating a budget that works for you. 

6. 6X Rule

• What Is 6X Rule?

The 6X Rule is a popular personal finance rule for building an emergency fund, which advises people to set aside a minimum of 6 times (ideally 12 times) of their monthly expenses in an emergency fund. This fund is designed to cover up any unexpected expense or event, such as job loss or a medical emergency. 

• Here's How The 6X Rule Works:

To calculate your emergency fund using the 6X Rule, you need to multiply your monthly expenses by 6 or 12 to get your emergency fund amount. 

• Let's Look At An Example Of 6X Rule:

Suppose your monthly expenses are ₹25,000 then you would aim to save ₹150,000 (6X of ₹25,000) or ₹300,000 (12X of ₹25,000) in your emergency fund. 

This might seem like a large amount, but remember that it is there to protect you from any unexpected financial shock. You can build your emergency fund over time by saving a portion of your income like 10% each month until you reach your goal. Once you have your emergency fund in place, you can have a peace of mind knowing that you have a financial safety in case of any emergency.

7. 100-X Rule

• What Is 100-X Rule?

The 100-X Rule is a simple rule which shows us that how much percentage of our investment amount should go towards equity and rest for debt. 

• Here's How The 100-X Rule Works:

100-X% of your investment amount should go towards Equity, 

X% of your investment amount should go towards Debt, 

Where X represents Age. 

To calculate how much percentage you would invest in equity, you have to minus your age from 100 and the remaining number will be the percentage you should invest towards equity and rest for debt. 

• Let's Look At An Example Of 100-X Rule:

Suppose your monthly investment amount is ₹10,000 and your age is 18 then you would invest 

₹8,200 (82%) towards Equity, 

₹1,800 (18%) towards Debt, 

This rule is not an exact but it provides a basic knowledge of investment, as it may vary as per your circumstances and your risk tolerance.

8. 4% Withdrawal Rule

• What Is 4% Withdrawal Rule? 

The 4% Withdrawal Rule, also known as The Retirement Rule, which is a popular method used to determine how much money you will need in your retirement to support your lifestyle in future without working for it actively. It is a simple and effective way of ensuring that you have enough money to last throughout your retirement years. 

This rule assumes that your lifestyle will not increase drastically every year but within 2-3% and it also assumes that your retirement savings would be invested 50% in stocks (NIFTY 50) and 50% in bonds or FDs. 

• Here's How The 4% Retirement Rule Works:

To calculate how much money you would need to save for retirement, you need to multiply your annual current expenses by 25 and adjust that amount as per inflation to get your target retirement savings amount. As the amount is inflation-adjusted, which means you need to take into account the inflation rate each year to calculate the amount you can withdraw.

• Let's Look At An Example Of The 4% Rule:

Suppose your annual current expense is ₹300,000 then you would need to save ₹7,500,000 (25 times of ₹300,000) without inflation-adjusted and ₹8,586,750 with inflation-adjusted (2 year's of inflation adjusted at 7% rate) to retire comfortably. In the first year of retirement, you can withdraw ₹343,470 (4% of ₹8,586,750) to cover your expenses. You can adjust this amount each year as per inflation to ensure that you have a steady stream of income in retirement while also preserving your retirement savings for as long as possible.

By following the 4% Withdrawal Rule, you can have a financial plan in place which can provides you a sense of security and help you to achieve a comfortable retirement.

9. 25X Rule

• What is the 25X Rule?

The 25X Rule is a popular rule for calculating the ideal amount of life insurance coverage a person needs. It suggests that individuals should have coverage equivalent to 25 times their annual income, including any debts or outstanding loans and future expenses too, such as their children's education or retirement plans.

• Here's How The 25X Rule Works:

To calculate the amount of life insurance you need using the 25X rule, simply multiply your annual income by 25. This will give you the coverage amount you should aim for to ensure your loved ones are financially secure in the event of your untimely death.

• Let's Look At An Example Of The 25X Rule:

Suppose your annual income is ₹600,000 to determine your ideal life insurance coverage, you would multiply ₹600,000 by 25 giving you a coverage of ₹15,000,000.

This may seem like a large amount but it will ensure that your family will be protected from any financial burden that may arise due to your sudden absence and it will hardly cost ₹1,500 per month. 

Remember that this is just a rule and your actual life insurance needs may vary depending on your unique circumstances. However, 25X Rule can be a helpful starting point in determining your life insurance coverage needs.

10. 40% Rule

• What Is 40% Rule?

The 40% Rule is a personal finance rule that suggests that your total sum of monthly EMI (Equated Monthly Installment) payments should not exceed 40% of your monthly gross income. This rule is designed to help peoples avoid overburdening themselves with loan payments and to ensure that they can manage their monthly expenses comfortably.

• Here's How The 40% Rule Works:

To apply the 40% Rule, you need to multiply your monthly gross income by 40% which will give you the maximum amount of monthly EMI payments you can afford each month. 

• Let's Look At An Example Of 40% Rule:

Suppose your monthly gross income is ₹50,000, then your total EMI payments should not exceed ₹20,000.

By following the 40% Rule, you can make sure that you are not financially burden by loan payments. 

11. 20/4/10 Rule

• What is the 20/4/10 Rule?

The 20/4/10 Rule, also known as The Car Rule, is a popular guideline to help people make informed decisions when purchasing a car. It is a straightforward and practical way of ensuring that you don't overspend on a car that you cannot afford.

• Here's How The 20/4/10 Rule Works:

20% of the car's total value should be paid as a down payment, 

The term period of car loan should not exceed 4 years, 

The monthly emi cost of car loan should not exceed 10% of your monthly gross income, 

By following this rule, you can make sure that your car expenses are within your means and you are not getting into any debt.

• Let's Look At An Example Of The 20/4/10 Rule:

Suppose you want to buy a car that costs ₹500,000 (On-Road Price) then you would

Pay a down payment of ₹100,000 (20% of ₹500,000), 

Take out a car loan with a term of 4 years or less (At 8% of car loan interest rate), 

The monthly emi cost of car loan will be ₹9,766 (10% of your gross income of your monthly income is ₹97,660), 

As this is not an exact, you may need to adjust it as per your personal circumstances. However, The 20/4/10 Rule will give you a good starting point for making a wise car purchase decision.

12. 3/20/30 Rule

• What is the 3/20/30 Rule?

The 3/20/30 Rule, also known as The House Rule, is a popular guideline to help people make informed decisions when purchasing a House. 

• Here's How The 3/20/30 Rule Works:

The cost of House should not exceed 3 times of your annual gross income

The term period of house loan should not exceed 20 years, 

The monthly emi cost of house loan should not exceed 30% of your monthly gross income, 

By following this rule, you can make sure that your house cost are within your means and you are not getting into any debt.

• Let's Look At An Example Of The 3/20/30 Rule:

Suppose your monthly gross income is ₹50,000 and annual gross income is ₹600,000 then you would 

Go with a house costing ₹1,800,000 (3X of ₹600,000), 

Take out a home loan with a term of 20 years or less. (At 10% of home loan interest rate) 

The monthly cost of home emi will be ₹

As this is also not an exact you may need to adjust it as per your personal circumstances. However, The 3/20/30 Rule will give you a good starting point for making a wise house purchase decision. 

Conclusion

In this blog, I have covered 12 personal finance rules that can help you manage your finances effectively. These rules include

1. Rule Of 72, 

2. Rule Of 114, 

3. Rule Of 144, 

4. Rule Of 70, 

5. 50/30/20 Rule, 

6. 6X Rule, 

7. 100-X Rule, 

8. 4% Withdrawal Rule, 

9. 25X Rule, 

10. 40% Rule, 

11. 20/4/10 Rule, 

12. 3/20/30 Rule. 

These 12 personal finance rules can help you make informed decisions and achieve your financial goals. By understanding these rules and adjusting them to your unique financial situation, you can create a solid financial plan for the future.

So what’s your opinion on these Top 12 Personal Finance Rules?

Let me know, I’d love to know what you think.

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Next Blog : April 25, 2023 At 10:00Am Indian Standard Time (IST).