3 personal finance thumb rules to help you make better financial decisions

It’s usually a good idea to put some money aside for hard times or for future goals. Many people find the financial planning process very tedious and time-consuming. However, if one follows certain personal finance thumb rules, the task of financial planning can be made much easier. In the blog, we will look at three rules to keep your personal finances on track.

Personal finance thumb rules 1: 

Given a fixed yearly rate of return, the rule of 72 is a straightforward approach to calculating how long it will take for an investment to double. To use the rule of 72, simply divide 72 by the expected annual rate of return. The resulting number is the approximate years it will take for the investment to double.

For example, if you expect your investments to grow at a rate of 7% per year, it would take approximately 10 years for them to double (72/7 = 10.29).

While the rule of 72 is a helpful tool, it’s essential to remember that it’s only an estimate. Many factors can impact the actual rate of return on investment, so the doubling time may be different than what is predicted by the rule of 72.

Personal finance thumb rules 2: 

The rule of 100-age is a simple way to estimate how much of your portfolio should be invested in stocks. The basic principle is to subtract your age from 100 to get the percentage of your portfolio that should be in equities. For example, if you’re 30 years old, the rule would suggest that 70% of your portfolio should be in stocks.

Some people argue that the rule should be modified for retirement accounts since you generally don’t need to access those funds until you’re older. There are a few different variations of the rule, but the general idea is the same. For example, one variation suggests that you subtract your age from 120 instead of 100.

The rule of 100-age is a starting point, not a hard and fast rule. Your actual asset allocation should be based on your specific goals, time horizon, and risk tolerance. However, if you are not sure where to begin, the rule of 100-age can be a helpful guide.

Personal finance thumb rules 3: 

If you want to buy a property, you will need to obtain a home loan and make regular EMI payments. Your ability to make these payments will largely depend on your income, which is why it’s important to know what the ideal EMI to income ratio is before you apply for a loan.

Generally speaking, your EMI should not exceed 30% of your monthly income. This means that if your monthly income is Rs. 50,000, your EMI should not be more than Rs. 15,000. However, this is only a general rule; if you have other circumstances in your favour, such as an excellent credit score, you may be able to apply for a loan with a larger EMI.

When considering taking out a loan, using a loan calculator to estimate your monthly payments is important. This will help you determine the ideal EMI to income ratio for your situation and whether you can afford the loan. Once you know this, you can start shopping around for the best interest rates and terms.

Final thoughts:

Irrespective of the thumb rules you use, you need to get the basics in place.

Firstly, it is essential to have a clear understanding of one’s income and expenses. Once this is done, one can start setting aside a fixed monthly amount towards savings. It is also crucial to understand one’s goals, both short and long-term. Based on these goals, one can allocate different amounts of money towards different savings plans. Lastly, it is important to review one’s finances regularly and make changes as and when needed.

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