Thumb Rule Of Finance: It’s Not as Difficult as You Think
Following thumb rule of finance :
1) Rule of Finance – Rule of 72
Rule 72 is used to estimate the number of years it would take to double your investment given your expected rate of return.
This is simplest way to know that when the invested amount will be double, you need not apply compound interest formula.
Number of years to take double = 72 / expected rate of return
For example, the Rule of 72 states that Rs.1 Lac invested at an annual fixed interest rate of 10% then it would take 7.2 years ((72/10) = 7.2 to grow to Rs. 2 Lac.
A number of years to take double = 72 / 10 % then it will take approximate 7.2 years to take double the money.
If someone wants to know that on how much interest rate required to double my money in 6 yrs then you can calculate with help of rule 72 as :
Return required % = 72 / 6 years = 12%.
If someone get 12% p.a return then his money will be double in 6 yrs.
2) Finance Rule – Rule of 114
Just like to the rule of 72, rule 114 is used to estimate the number of years it would take to triple your money by given the rate of return.
This is simplest way to know that when the invested amount will be triple (3 times), you need not apply compound interest formula.
Number of years to triple (3 times) money = 114 / rate of return
If rate of return is 6 % p.a. then here we calculate how many years to take it to triple your money.
Number of years to triple money = 114 / 6 then it will take approximate 19 years to triple your money.
So if you earn 6% interest rate then it will take 19 yrs to triple your money.
3) Finance Rule – Rule of 144
This rule is used to estimate the number of years it would take 4 times the amount given the expected rate of return.
This is simplest way to know that when the invested amount will be triple (3 times) , you need not apply compound interest formula.
No. of years to 4 times of money = 144 / rate of return
If rate of interest is 6% p.a. then how many years it will take to 4 times of our money.
No. of years to 4 times of money = 144 / 6% then your money will be 4 times in 24 years.
If you have invested Rs. 1 Lac @ 6% p.a. then it will take 24 years to 4 times Rs. 4 Lac.
4) Finance Rule – House Affordability rule
This rule helps the home buyer decide on the maximum amount they can spend on buying a new house. It helps to decide the purchase price of new house.
The maximum value of a new house = 2.5 X Annual Income.
Let us say the annual income is 10 lacs. The maximum value of the house should be less than 25 lacs (10 X 2.5)
This is just rule and in the current scenario where property prices are higher so you need to increase it according to your EMI paying capacity.
5)Finance Rule- 28% Housing EMI rule
This rule says that the maximum amount one can pay for housing loan monthly EMI payments.
When you purchase a new house on loan then you must aware that maximum EMI you should consider.
Monthly Housing loan EMI = 28% of gross monthly income
If you earn Rs.50,000/- per month then your monthly home loan EMI should not exceed Rs. 14000/- p.m.
6) Finance Rule –36% Debt rule
This rule says that the maximum amount one can pay for debt loan monthly EMI payments.
This is total EMI of your all loan including credit card EMI also where you convert your purchasing in EMI.
Monthly EMI payments = 36% of gross monthly income
If your salary is Rs.50,000/- a month then the total of all your monthly loan EMI’s should not exceed 18,000 per month.
You should try to reduce your loan EMI because your EMI reduces your savings.
7) Finance Rule –Emergency Fund rule
This rule says the amount a person needs to keep aside in a liquid asset like cash, saving account balance or FD for any emergencies like loss of jobs, illness, business downturn, etc.
One should not forget this rule because when you face a job loss or business downtrend then this fund will help you to pay your EMI and households expenses.
Emergency Fund required = 6 X Monthly household expenses including EMI
Let us say your monthly EMI and household expenses add is Rs. 25,000 then your emergency fund should be ideally 1,50,000.
8) Finance Rule –10% saving rule
This rule talks about the amount we need to save per month for our retirements. Higher the saving higher will be your retirement corpus.
Minimum monthly savings amount = 10% of Gross monthly income.
If you earn Rs.50,000/- P.M. then minimum you should save Rs. 5000/- per month for your retirement. This is the minimum amount, ideally, you should try to save 20% of your monthly income.
09 )Finance Rule – Retirement Corpus rule
This rule says of the retirement corpus amount you need to accumulate before retirement to have a peaceful and financially stress-free retirement life.
Retirement corpus amount = 20 X Gross Annual Income
Let us say your annual income is 5 lacs then your retirement corpus should at least be 1 cr. ( 5 lacs X 20) .
10)Finance Rule –100 minus age rule
This rule says tell an investor what portion of his portfolio should be inequities. The logic is that when you are younger you can take more risk because you have a long time horizon.
% of the portfolio in equities assets = (100 – your age)
If you are 30 years old then the suggested percentage of allocation to equities would be 70% (100 – 30).
These rules give you an approximate value and saving and investment are vary from person to person, this rule just gives you a general and it is only for education purpose.
I try to cover maximum rule , please comment if you know any other finance thumb rule.
Thanks for reading…