11 Personal Finance Rules For Beginners
Making informed decisions about your money becomes easier when you understand personal finance. A solid understanding of personal finance can help you manage your income, expenses, savings, and investments more effectively. A financial plan that includes such knowledge is helpful when planning for retirement, buying a home, or funding education. This method can also help you avoid debt, improve your credit score, and build an emergency fund. In this way, you can deal with unexpected financial problems better.
The following are 11 rules that everyone should know about personal finance. These simple, practical, and effective personal finance rules can benefit people of all ages.
Here is the Introduction to Personal Finance Challenges For Beginners
1) Rule of 72 (Double Your Money)
If you want to know how long it will take you to double your money at a given interest rate, divide 72 by the interest rate. For example, doubling your money will take 9 years at an interest rate of 8 percent. It will take 12 years at 6 percent, and 8 years at 9 percent.
2) Rule of 70 (Inflation)
To effectively manage finances and preserve wealth over time, it's crucial to account for the impact of inflation. Your investment value will be halved after 70 has been divided by the inflation rate. For example, if you have a 7 percent inflation rate, your money will be worth half as much in 10 years. This underscores the importance of strategic investment and financial planning to protect purchasing power against the erosive effects of inflation.
3) 4 Percent Withdrawal Rule
For financial freedom, you need a corpus equal to 25 times your estimated annual expenses. The corpus you need for voluntary retirement after 50 years of age is Rs 1.25 crore if your annual expenses are Rs 500,000. The fund should be split 50 percent between fixed income and equity, and withdrawal proceeds of 4 percent, or Rs 5 lakhs, should be made annually. 96 percent of the time, this rule works over 30 years.
4) 100 Minus Age Rule
Assists in asset allocation. You can calculate your equity allocation by subtracting your age from 100. The equity component of your portfolio should be 70% (100-30) if you're 30 years old. You should have 40% equity and 60% debt in 60 years.
5) 10-5-3 Rule
In order to set reasonable expectations for returns, the following rule must be followed:
- Mutual funds or stocks can return 10 percent
- Fixed deposits earn a 5 percent return
- Savings accounts offer a 3 percent return
6) 50-30-20 Rule
It is recommended that you allocate your income in the following manner:
50% of the money goes towards necessities (groceries, rent, EMIs).
Thirty percent goes to wants (entertainment, vacations)
The remaining 20 percent goes to savings (equity, mutual funds, debt, and fixed deposits).
7) 3X Emergency Rule
You should have an emergency fund that's at least three times your monthly income for things like job losses or medical emergencies. Try to keep six times your monthly income in liquid assets.
8) 40 per cent EMI Rule
It is recommended that you do not exceed 40 percent of your income on EMIs. Suppose you earn Rs 50,000 per month and have EMIs of Rs 20,000. Finance companies use this rule to determine whether a loan is eligible.
9) Life Insurance Rule
To establish sound finance habits, adequate life insurance coverage is essential. A good life insurance policy should cover 20 times your annual income. Suppose you earn Rs 5 lakh per year and you have life insurance coverage of Rs 1 crore.
10) Rule of 144
It is possible to double your money within a few years by using a SIP (Systematic Investment Plan). SIP portfolios double in value after 9.6 years (144/15) if the interest rate is 15 percent.
11) Revolving Credit Formula
Calculate the annual cost of revolving credit by multiplying (1+i%) by 12-1. Suppose a credit card company charges 3 percent interest per month, making the annual compound cost 42.6 percent.
The tips below will assist beginners in building a solid financial foundation and navigating the challenges of managing their money effectively. Budgeting, saving, investing, and protecting your financial future are all made easier with these guidelines. Using these concepts will help you make informed long-term financial decisions.