Understanding and managing personal finance is not everyone's cup of tea. Nonetheless, an easy access to information available today has provided a much needed lift in the area and has acquainted people with basic know how on the subject say for instance most people or for that matter millennials in the hope of getting higher return have aggressively turned to equities amid the pandemic last year. So, they now know higher returns come with higher risk i.e. taking the plunge into equity market.
So, for broadening your understanding in the area of personal finance, here are given some important personal finance rules:
1. Rule of 72:
This rule helps to know in how much time your investment will double in value. For the computation of the same you just divide this number ‘72' by the interest rate on the investment, say if it is at 5% for a FD then your FD amount (principal value) shall take 72/5 =14.4 years to double in value.
This fundamental rule holds significance among investors, fund managers or fund house for that matter alike.
So, this rule can be used to compare the different asset classes, say equities, mutual fund, gold and other debt instruments.
Another probable use of the ‘rule of 72' is not highly popular and herein you can determine the time your investment shall take to halve itself in value owing to inflation. Say in case as is the scenario now when CPI inflation data revealed just yesterday for May month came in over 6% so now your investment shall halve in:
Time taken to halve your investment's value = 72/6 i.e. 12 years
For better accuracy you can consider using other variations of the rule.
2. Rule of 114:
Similarly there is rule using which we can know in how many years or in what time will your investment treble in value. Here you divide the number ‘114' by the return percentage or the interest rate on the investment.
Say if a mutual fund offers you 12 percent return then it shall be able to treble in value in
= 114/12 = 9.5 years , so your investment in the particular mutual fund will treble in a period of nearly 9.5 years.
3. Rule of 144:
This rule tells the time which an investment shall take to quadruple your money at a given rate.
Say as is the case now, your FD fetching just 5% return will be able to quadruple its value in
= 144/ % return = 144/5 = 28.8 years.
4. Rule of 70:
This is somewhat close to the second use of ‘Rule of 72' and herein you can know that at a given or current inflation rate, in how much time will your investment or money halve in value.
So, now considered the latest released data CPI of over 6%, your investment will halve in value in 70/6 = more than 11 years.
5. 4% Withdrawal rule:
This rule is typically for retirees and helps them decide the quantum of withdrawal they should ideally make from their retirement corpus every year such that they are provided a steady stream of income that does not disrupts their overall corpus in a big way. This is to ensure that future payments keep coming through the course of the retirement.
Say for instance if you have a retirement corpus of Rs. 1.25 crore considering your annual expense of Rs. 5 lakh, then you should withdraw 4% i.e. Rs. 5 lakhs annually and keep the remaining sum intact. This rule is said to work 96% of time for the retirement tenure.