The term ‘Personal Finance’ has become a buzzword in recent years, with many people using it regularly in relation to their own or family’s consumption and savings. Personal finance is the wise management of money such as budgeting, saving, and spending monetary assets and wealth by an individual or family while taking into account various financial risks and future occurrences. Millennials, in particular, must keep track of their money in order to flourish in a world of competition and unpredictability.
The following are some personal financial principles that everyone should follow in order to govern and handle their own finances:
Use Rule of 72 to know the time period needed to double your income
Everyone wants to boost their salary and save more money. Divide the number 72 by the yearly interest rate to determine the number of years necessary to double your money. Divide 72 by 8 to get 9 years if you want to know how long it will take to double your money at 8% interest. Similarly, it will take 12 years at a 6% pace and 8 years at a 9% rate. This will assist consumers in determining the period of time required to see their wage double and preparing their spending charts appropriately so that they do not face money shortage.
Apply Rule of 70 to check the depreciation rate of your investment
An essential component of personal finance is keeping track of your investment’s depreciation value so you can determine if it is profitable or not. You may determine how quickly the value of your investment will be reduced to half of its current value by dividing 70 by the current inflation rate. It will assist you in determining if a certain investment is an asset or a liability. Inflation at 7%, for example, will diminish the value of your money to half in ten years.
Put 50% of income into fixed income & 50% into equity
To manage your personal finances, it is important to divide your income into two halves so that you do not indulge in needless spending. You should invest 50% of your pay in fixed income and 50% in equity, resulting in income segregation. Withdraw 4% from your bank on an annual basis. Throughout a 30-year span, this rule works 96% of the time.
Stock Allocation Rule – 100 minus your age rule
The allocation of assets is based on this premise. According to this concept, persons should possess a percentage of stocks equal to 100 minus their age. Hence, divide your age by 100 to determine how much of your portfolio should be allocated to stocks.
Suppose your Age is 30 so (100 – 30 = 70)
Equity : 70%
Debt : 30%
But if your Age is 60 so (100 – 60 = 40)
Equity : 40%
Debt : 60%
Asset Allocation Rule – 10-5-3 Rule
According to the asset allocation or 10-5-3 rule, yearly returns on equities are anticipated to be 10%, 5% on bonds, and 3% on cash (as well as liquid cash-like products). As a result, it is recommended that one have modest return expectations on shares.
10℅ Rate of return – Equity / Mutual Funds
5℅ – Debts ( Fixed Deposits or Other Debt instruments)
3℅ – Savings Account
50-30-20 Rule – about allocation of income to expense
This guideline may be used to divide your spending for different objectives and to manage your spending so that you don’t overspend and have control over your budget and personal finances.
Divide your revenue into three segments to assist you channel its flow:
50℅ of your earnings should be dedicated to your needs
30℅ of your salary should be allocated for your wants and desires
20℅ of your remunerations should be kept aside for your savings
This is not a hard and fast rule, but you can surely save more money by showing discipline when it comes to frivolous purchasing.
3X Emergency Rule
People should always save at least three times their monthly income in case of an emergency caused by a loss of job, a medical emergency, or other unforeseen event.
3 X Monthly Income
To be safe, persons should save six times their monthly income in liquid or near-liquid assets to assure income stability and independence from other sources.
40℅ EMI Rule
Several financial gurus recommend that customers never invest more than 40% of their income in EMIs. If a person earns $50,000 per month, his or her EMIs should not exceed $20,000. It is a general yardstick norm used by financial organisations to authorise loans, but it may also be used by people to manage their money.
Life Insurance Rule
Personal finance might also be governed by the Life Insurance Rule. The ideal approach to compute the minimum value assured in term life insurance is 10 times the annual salary, which means that if your current yearly pay is 10 lakh, you should have a life insurance cover of at least 1 crore.