There are too many financial investment pieces of advice, too many tips to keep track of and most of these we fail to understand due to their complexities.
For a layman to simply understand when he can expect his investment to double or triple, or how much should he save to have a stable future, there are some basic mathematical rules that one can apply. So pick up a normal calculator and get started.
Note that these are fair estimates and not exactly accurate especially when it comes to higher interest rates.
1. The rule of 72
This is a simplified way to estimate how long it will take for your investment to double on compounding. Just divide 72 with the annual interest rate you are offered, it will give you the number of years money to be twice as much. For example, if the annual interest rate is 8 percent and you have invested Rs 1,000, it will take 72/8 = 9 years for it to become Rs 2,000.
2. The rule of 114
You apply the rule of 114 when you want to know when your money will triple on compounding. Similar to the rule of 72, you need to divide 114 with your annual interest rate to find the number of years it will take to triple your investment. For the same example above, it would take 114/8=14.25 years for the money to grow to Rs 3,000.
3. The rule of 144
Applying the rule of 144, you can find out when your investment would quadruple on compounding. The method is the same as above. Just divide 144 by the interest to arrive at the number of years.
4. 50:20:30 Rule
The is general rule especially useful for young individuals to manage their earnings better. According to the rule, from the total salary one makes after all the tax deductions, they should spend 50 percent on living expenses like bill payment, food, etc. The other 20 percent should be used to fulfill short term goals and make an emergency funds while the rest should go into long term goal investment.
Keeping this rule in mind you will be able to save better.
5. 100 minus your age
The formula can be applied to access the risk you should be taking based on your age. According to the rule, you should minus your age with 100 to arrive at the percentage of funds you should invest in equities.
For example, if you were planning to make Rs 5,000 in investments every month and you are 20 years of age, you should put (100-20) 80 percent of Rs 5,000 in equity and the rest in safe investments. Which means to say that one should diversify as they get older, reducing the extent of risk.
6. Future Value
While you make an investment, the inflation factor should definitely be considered. Rs 10,000 today will not be worth the same in 10 years down the lane.
Your purchasing power will be lowered, which is why you will need to be calculating the value of the same Rs 10,000 in the future to understand if you are getting your investments worth from the plan you choose.
Future Value= Present Value (1+r/100)n, is the formula to arrive at the value. Here 'r' is the annual rate of inflation while 'n' is the time left to reach your goals.