Ever thought of putting rules on your finances?
We tend to have rules for every other area of our life, how much to eat, how much we should watch TV, limiting the amount of social media, amount of time to brush our teeth, etc. Rules give us structure and guidance. The bottom line is having a list of money rules to live by will be life-changing and make things easier. Life should be enjoyed; we do not recommend you to live on the bare minimum, but having a rule book and sticking to it will allow you to cover your expenses, save for retirement, and do the activities that make you happy.
Let's dive into five money rules that you must know:
50/30/20 Budget Rule
The 50-30-20 budget rule is an intuitive and straightforward rule to help people reach their financial goals within their timeline. It states that one should spend up to 50% of your after-tax income on needs and obligations that you must have or must do. The remaining half should be divided into 20% for savings and debt repayment and 30% for everything else that you might want. The Rule is a template intended to help individuals manage their money and save for emergencies and retirement.
Also read: What is the 50/30/20 Budget Rule?
Rule of 72
This Rule is a fast and helpful formula popularly used to calculate the number of years needed to double the invested money at a given annual rate of return. The Rule applies to compounded interest rates and is reasonably accurate for IRs that fall between 6% and 10%. It can go through to anything that increases exponentially, such as GDP or inflation; it can also indicate the long-term effect of annual fees on an investment's growth.
Always note, the Rule of 72 applies to compound interest and not simple interest.
Also read: What Is Compound Interest and How It Works
40% EMI Rule
All of your EMIs combined should be no more than 40 percent of your In-hand income. For instance, if your In-hand pay is Rs 50,000, then the combined EMIs should ideally be Rs 20,000. If you are thinking of going overboard with this limit, you might strain your finances, lower your savings, and run into the risk of defaulting on your EMIs. Life throws unexpected situations which we can neither avoid nor control. It's advisable to be prepared for such cases and follow the rule to manage and control the way your EMI works.
Also read: Explained: All You Need to Know About Debt
The 3X Emergency Rule
The term Emergency Fund refers to money kept away to use in times of financial distress. An emergency fund aims to improve financial security by creating a safety net that can meet uncalled expenses, such as an illness or major home repairs. It is advisable to own an emergency fund that's at least three times your current monthly income which is the bare minimum. You can move up to six months and keep building if you need to do so, but this fund will keep you financially stable in emergencies such as loss of employment, urgent travel, repairs, etc.
The 4% Rule
The 4% rule is a common rule used in retirement planning to help you avoid running out of money. It states that you can (without any hassle) withdraw 4% of your savings in your first year of retirement and alter that amount for inflation for every subsequent year without risking running out of money for the next, at least 30 years.
For example: Your annual expense is 500,000, then the corpus required to retire is 1.25 cr. If we put 50% into fixed income & 50% into equity and withdraw 4% every year, it would be Rs.5 lakh. This rule works for 96% of the time in a 30 year period.
These five rules of thumb are the most basic guide to help you manage your money better. Depending on which life stage, income, and life priorities you are, you may tweak these rules to achieve the best results.
(Check out 'Learn & Grow with Wizely' 'to read and learn all about personal finance and financial planning.)