Some Unknown Personal Finance Thumb Rules Every Individual Must Be Aware of ~ The Finance Magic – Stock Market | Personal Finance

Reading Time: 4 minutes

Personal Finance
Is managing your finances difficult?

Personal finance is a very taboo
topic. People usually don’t discuss it. Personal finance is not only about
managing own money, but it teaches us to be disciplined and puts value to our
money. Below are some of the known unknown rules of personal finance everyone should be
aware of.

1) Net-worth rule: The first and foremost rule

This personal finance technique will
help you in finding your net worth in monetary terms, which will help you in making
any financial decisions.

Use this formula to know whether you
have enough net-worth = (Current age*pre-tax income) divide by 10

Example: Age = 25, Pre-tax income = 7.5 Lakh p.a.,

Net worth
= (25*750000)/10 = Rs. 18,75,000

2) 3x Rule:

The value of your home should not be
more than 2.5 to 3 times your gross annual income. These will help us in taking
a calculated risk and will give a clear picture of our dream house.

For Example:
Gross annual income = 9 Lakh p.a.

Thus, house
value should be between 22.5 to 27 lakhs

3) The rule of EMI:  

EMI shouldn’t exceed 35% of your
Gross income. Loans should always be as low as possible. I would personally
suggest you to keep it Nil.

For Example:
Monthly income = Rs. 50,000

Thus, the maximum
EMI should never exceed Rs. 17,500 per month, i.e. 35% of monthly income.

Also Read on FinMedium:  Book Summary #1: Bad Money by Vivek Kaul

4) Student Loan rule:

A student loan is a necessity for
people who can’t afford education and one should look at various parameters
before applying for it.

If you avail student loan, the loan
amount shouldn’t exceed your 1st annual salary post-education. (Take a wise

5) 20/4/10 Rule:

The above rule would seem as if it is
a date but this rule applies to the ones who are planning to buy a Car.

While availing Car Loan, keep a minimum
20% as Down payment, the term of the loan shouldn’t be more than 4 years, and
most importantly, make sure EMI doesn’t exceed 10% of your income.

6) 20x Corpus Rule:

Ever wondered what amount should you
keep aside to retire stress-free and live your rest of life independently.

Ideally, this rule says you should
save 20 times your annual income as a retirement corpus.

For Example:
Gross annual income = 9 Lakh p.a

Thus, Retirement
Corpus = 9 * 20 = Rs. 1.8 Crore

7) 4% Rule: Rule of easing your expense

This rule suggests that you should
withdraw 4% every year from your retirement corpus to maintain your standard of

This rule helps you in maintaining
the balance between lifestyle and expense

 8) The 6× Emergency Rule:

After this corona pandemic, you must
better understand, how important is an emergency fund and we all should
maintain it to survive through tough times.

Also Read on FinMedium:  India Grid Investment Trust: To Trust or Not to Trust

This rule says an emergency fund
should be 6 times your monthly expenses, I would personally suggest you, keep
it between 6 times to 12 times.

9) The 10× Life Rule:

Life insurances are very important
as life is unpredictable and you should secure the lives of your loved ones so
that they won’t face any difficulties even if you are not there with them.

should never be looked at as an investment. Buy a good term life insurance if

The rule says you should have life
insurance 10 times your gross annual income.

10) 120 minus age

This rule is one of my favorites and
gives an idea of “how an individual should manage his risk?”

This rule is for
those who are willing to invest in the equity market and earn excess returns but
are always confused while diversifying their portfolio.

This rule says, your equity
allocation from the total portfolio should be 120 minus your current age.

For Example:
Age = 25,

Thus my approx.
investment in equity securities should be around = 120 – 25 = 95%

11) 50/30/20 Rule:

Every salaried person might have heard
about this at some point in his life most probably from his family or friends
on how he should utilize his income? And make the best use it.

Also Read on FinMedium:  Syngene International Limited - 2020 Annual Report Notes

This rule says, from total income,
allocate 50% towards your needs, 30% towards your wants and 20% towards your

*Here “needs” mean necessity like
food, clothes, and shelter, and “wants” refers to luxury like spending on
vacation, purchasing luxury products, etc.

12) Rule of 72:

This rule gives us the answer to the
question “How long will it take to double my investment”

The simple formula to find out is: –
Divide 72 by rate of return, you will know in how many years your investment
will double.

For Example:
If a man has invested a sum of 50,000 in a fixed deposit at a rate of 8.5% p.a.

Then we
can find the period to double the investment by = 72/8.5 = 8.47 years i.e. 

investment will be worth 1,00,000 by the end of 8.47 years.

Disclaimer: Though these rules are theoretical,
the best personal finance is up to us. Be disciplined

If you found my article useful then
do comment your views and share it with all your family and friends. 
Let’s spread financial literacy

Source link

Every Wednesday and Saturday, we send Info-Graphic and FinMedium Weekly Digest newsletters to our 25000+ Subscribers.

Join Them Now!

Please Share :)
The Finance Magic
We're dedicated to providing you vast investment knowledge, with an emphasis on making you understand the "WHY" in finance.
Back To Top