What is the golden rule of finance?

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 Greetings,

Just 10 simple rules to take control of your finances:


Let’s understand each of these rules in detail.

1. THE NET WORTH RULE

This rule originated from 'The Millionaire Next Door' book. It has a simple way to determine if you are wealthy in the US. Multiply your age by your pre-tax annual income & divide by 10. If your net worth surpasses the result, you are wealthy.

There’s an Indian version of this as well. Some experts suggest using 20 instead of 10 as the divisor in the Indian context. For instance, say you're 30 and earn Rs 12 lakh annually. Your net worth should be at least Rs 18 lakh to earn the 'wealthy' title.

2. RULE OF 72

This helps you determine the time it will take for your investment to double. How does it work? Simply divide "72" by the rate of return you are earning. For example, with a 9% return, it will take 8 years (72/9) to double your investment.

3. RULE OF 70

This tells you the impact of inflation. Divide "70" by the inflation rate, you get the no. of years after which your money's worth will be half. If the inflation rate is 7%, your money’s worth will be half in 10 yrs.

4. 100-AGE RULE

It is a simple way to determine your equity-debt mix. Subtract your age from 100. The number you get is the percentage you can invest in equities. Rest should be in debt.

Example: If you are 30, invest 70% in equity & 30% in debt.

But it isn’t perfect.

If you are a beginner, you can take this rule as a reference for asset allocation. But as you evolve as an investor, it’s better to decide on an asset mix based on your goals. You can also add gold to your portfolio to optimize risk and returns.

5. 50-30-20 RULE

This concept helps you create a budget by breaking your finances into three separate parts.

50% for needs

30% for desires

20% for investments

Of course, you can tweak it and invest more if you like. But don’t go below 20% to secure your future.

6. 6X RULE

It helps you decide how much money you must keep aside for emergencies. Before investing your money, you must save at least 6 months of expenses for a rainy day.

Say, your monthly expense is Rs 50,000. Keep 50,000 x 6 = Rs 3 lakh aside as a safety net.

7. 20X TERM INSURANCE

This rule recommends that your life insurance coverage must be at least twenty times your yearly earnings. For example, say, your annual income is Rs 5 lakhs. Then you must get a term life cover of 1 crore.

8. 40% EMI RULE

This one suggests your total loan EMIs should not exceed 40% of your income. Crossing this threshold means you're burdened with excessive loans. And that can result in missing out on investment opportunities and never achieving financial freedom.

9. 25X RETIREMENT RULE

It recommends having at least 25 times your yearly expenses as your retirement corpus. For instance, if your annual expense is Rs 12 lakhs, you must have a corpus of Rs 3.6 crores.

Pro Tip - Save more (30X or 35X) if you plan to retire early.

10. THE 10% HIKE RULE

This one highlights the importance of giving a hike to your investments.

Here’s an example:

Monthly SIP: Rs 5,000

Tenure: 30 yrs

Annualized return: 12%

Final Corpus: Rs 1.76 cr

But if you give your SIPs a 10% hike every year, your final corpus: Rs 4.42 cr

If you find a 10% hike challenging, you can go for a 5% or 3% hike as well. The key is to increase your SIPs as your income grows.

C&P Quora ET Money

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