Top 11 Financial Planning Thumb Rules | Learn With ETMONEY

A rule of thumb refers to something which can be easily learned and easily applied to a situation. These rules are mostly based on practical experience and are present everywhere .. including investing. In this video, Shankar Nath tells us 11 popular thumb rules that you can use in growing, saving and managing your money.

What’s covered in the video:
00:00 Introduction
00:30 RULE OF 72
01:28 RULE OF 114
02:39 RULE OF 70
03:34 10-5-3 RULE
04:15 100 MINUS AGE RULE
05:18 4% WITHDRAWAL RULE
06:27 50-30-20 RATIO
07:35 3X EMERGENCY FUND RULE
08:27 1 WEEK SPENDING RULE
09:48 40% EMI RULE
10:37 20X LIFE COVER RULE

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1. RULE OF 72
The rule of 72 helps you estimate when your money will double. To know when your money will double simply take 72 in the numerator and divide it by rate of return. To reverse this rule to determine how much returns you need from a financial instrument to double your money. Divide 72 by the number of years in which you want to double your money.

2. RULE OF 114
Rule of 114 gives you an estimate of how much time will it take for you to triple your money
For instance if you were to invest 1 lakh rupees in a product that can deliver 12% annual returns then per the rule of 114 this 1 lakh will become 3 lakhs in about 9-and-a-half years

3. RULE OF 70
The rule of 70 estimates the impact of inflation on your wealth.
In other words, this rule determines the value of your current wealth a few years down the line.This is done by using this number 70 and dividing it by the expected long term inflation rate.The resulting number gives you the number of years by when your wealth will be worth half of what it today

4. 10-5-3 RULE
A primal factor in our investment decisions is the expected rate of return.
And the 10-5-3 is a thumb rule that is often cited in most long term investing calculations
The rule is quite simple and says that when making long term decisions expect
-10% annual return from equities
- 5% yearly return from debt instruments
- 3% annualized return from your savings bank account

5. 100 MINUS AGE RULE
The 100 minus age thumbrule is a simple way to program one’s asset allocation i.e. how much one should allocate in equities and how much in debt . This is done by subtracting your age from 100 and the resulting number is the percentage of your wealth that should be invested in equities.

6. 4% WITHDRAWAL RULE
The 4% withdrawal rule is a post-retirement thumb rule .. and helps you determine how long your retirement fund will last. From a 4% context .. the rule says that if you have accumulated x amount of money at retirement then you should withdraw only 4% of this x amount in every retirement year.

7. 50-30-20 RATIO
The 50/30/20 rule of thumb is a guideline for allocating your budget accordingly: 50% to “needs,” 30% to “wants,” and 20% to your financial goals.

8. 3X EMERGENCY FUND RULE
The 3x emergency fund rule is a rather simple one and says that one should .. at all times .. keep three times of your monthly income in an emergency fund
The purpose of this fund will be to keep you financially stable in case of emergencies like loss of employment, urgent travel, repairs, a medical emergency etc.

9. 1 WEEK SPENDING RULE
The 7 Day Rule is a great strategy to prevent impulse spending and buyers remorse. The principle is very simple. You give yourself a “cooling-off period” of 7 days before making purchases.

10. 40% EMI RULE
The 40% EMI rule is something that loan providers and credit card companies use when they first receive a loan application.This thumb rule says that all your EMIs combined should ideally be no more than 40% of your take-home income.

11. 20X LIFE COVER RULE
A personal finance portfolio is never complete without a life insurance policy
So if you have life insurance or are planning to buy one do ensure that the sum assured offered to you is at least 20 times your current annual income.

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