The term “personal finance” has become a buzzword in today’s times, as many people frequently use it in connection with their individual or family expenses and savings. Personal finance refers to the judicious management of money such as budgeting, saving and spending of monetary assets and wealth by a person or family, taking into account various financial risks and future events. Millennials, in particular, need to monitor their finances in order to thrive in a world of competition and uncertainty.
Some of the personal finance rules that everyone should follow to organize and control their personal finances are:-
Use Rule 72 to find out how long it takes to double your income
Everyone wants to double their income and increase their savings. To find out how many years it takes to double your money, you need to divide the number 72 by the annual interest rate. For example, if you wanted to know how long it would take to double your money at 8% interest, you would divide 72 by 8 and get 9 years. Similarly, at 6% rate, it will take 12 years and at 9% rate, it will take 8 years. This will help people gauge the amount of time needed to see their salaries multiply and plan their spending accordingly so that they don’t have to deal with a dearth of money.
Apply rule 70 to check the depreciation rate of your investment
An important aspect of personal finance is to oversee the amortization value of your investment so that you can determine whether it is profitable or not. You can divide 70 by the current inflation rate to calculate how quickly your investment will be reduced to half its current value. It will help you understand whether the investment is an asset or a liability. For example, an inflation rate of 7% will halve the value of your money in 10 years.
Invest 50% of your income in fixed income and 50% in equity
To manage your personal finance, it is a primary concern that you divide your income in two so that you do not get involved in wasteful spending. You must allocate 50% of your salary to fixed income and 50% to equity, separating your income. Now, withdraw 4% from your bank on an annual basis. This rule works 96% of the time in a 30-year period.
Inventory allocation base – 100 minus your age base
Assets are allocated on the basis of this principle. This rule states that individuals must own a percentage of the shares equal to 100 minus their age. So, subtract your age from 100 to find out how much of your portfolio should be set aside for stocks.
Suppose your age is 30, so (100 – 30 = 70)
But if you are 60 years old (100-60 = 40)
Asset Allocation Rule – 10-5-3 Rule
The Asset Allocation Rule or 10-5-3 states that the annual return on stocks is likely to be 10%, the rate of return for bonds is 5% and cash (as well as liquid cash-like investments) is 3%. Therefore, one is advised to have reasonable expectations of returns on stocks.
10 Rate of Return – Equity / Mutual Funds
5℅ – Debt (fixed deposits or other debt instruments)
3℅ – Savings Account
20-30-50 Rule – On Allocation of Income to Expenses
This rule can be applied to divide your spending for different purposes and monitor so that one does not overspend and control one’s budgets or personal finances.
Dividing your income into three parts will help you direct its flow:-
50% of your earnings should be allocated to your needs (groceries, rent, emi, etc.)
30℅ of your salary should be devoted to your wishes and desires (entertainment, vacations, etc.)
20 of your bonus should be set aside for your savings (equity, microfinance funds, debt, loan repayments, etc.).
This is not a hard and fast rule, you can definitely save more by exercising self-control when it comes to reckless spending.
3x emergency base
Taking into consideration future undesirable accidents, people should always put at least 3 times their monthly income into emergency funds in case of necessity arising from job loss or medical emergency, etc.
3 X monthly income
To be on the safer side of things, people should allocate six times their monthly income in liquid or semi-liquid assets to ensure income is stable and not depend on other sources.
40℅ base EMI
As suggested by many financial experts, people should not exceed the limit of investing 40% of their income in EMI. If a person earns £50,000 a month, he or she must have no monthly installments (EMIs) of more than INR 20,000. It is a general standard rule that finance companies follow in order to penalize loans but which individuals can use to manage their finances.
life insurance rule
The life insurance rule can also be used to organize personal finance. To assess the minimum amount guaranteed in life insurance, the best way to calculate is 10 times the annual income, which means if your current annual salary is $10, you must have life insurance cover of at least Rs 1 crore.
(By Kumar Bennett, Founder and CEO of FinMapp)