These are primarily rules of thumb and will act as a quick guide, but not gospel truths.
Thumb Rule of 72:
To get the number of years to double your money at a given rate of return, divide 72 by interest annual rate. For example, if one wants to know how long it will take to double the money at 12% interest, dive 72 with 12 and get 6 years. It will take 6 years to double the money at 12% rate. At the same time, it will take 12 years to double at a 6% rate.
E.g., Rs 1 Lac at 6% will become Rs 2 Lac in 12 years. Same 1 Lac will become 2 Lac in 6 years, 4 years, and 2 years at 12%, 18%, and 36%, respectively.
Thumb Rule 114
To get the number of years required to triple your money at a given rate of return, divide 114 with an annual rate of interest. For example, at 8% interest, it will take 14.25 years to triple your money.
And at 12% interest rate, it will take 9.5 years to triple your money.
E.g., Rs 1 Lac at 6% will become Rs 3 Lac in 19 years. Same 1 Lac will become 3 Lac in 9.5 years, 6.33 years, and 3.17 years at 12%, 18%, and 36% rates.
Thumb Rule of 144
By dividing 144 with a given interest rate, one can get the number of years required to quadruple his money. For example, at 12% interest, his amount will be four times in 12 years. At the same time, it will take 24 years at a 6% interest rate.
E.g., Rs 1 Lac at 6% will become Rs 4 Lac in 24 years. Same 1 Lac will become 4 Lac in 12 years, 8 years, and 4 years at 12%, 18%, and 36% rates.
Thumb Rule of 70
Divide 70 with the present inflation rate will give the number of years required to reduce the value of money to half of its present value. For example, an inflation rate of 7% will reduce the value of money to half in 10 years.
E.g., The future value of present Rs 1 Lac, will be Rs 0.5 Lac in 10, 8.75 and 7 years at 7%, 8%, and 10% inflation rates.
Thumb Rule 4%
Corpus Required for Financial Freedom will be 25 times of Annual Expenses.
If the annual expense is Rs 10,00,000/ then the corpus required to retire is Rs 2.5 cr.
By investing 50% in fixed income and 50% in equity investments and withdraw 4% every year, one can get Rs 10 lac per annum. Tis rule works well up to 96% of times in a 30-year period.
Thumb Rule 100 minus age
For asset allocation in the equity-related investments, subtract a person's age from 100, and allocate to the equities.
Ideal portfolio with 75 % in equity and 25% debt for a 25-year-old person and 30% in equity, and 70% debt for a 70-year-old.
Thumb Rule 10-5-3
A person should have reasonable return expectation like:
10℅ Rate of return from equity /equity mutual funds
5℅ - Rate of return from debt (fixed deposits or other debt instruments)
3℅ - Savings Account
Thumb Rule 50-30-20 for allocation of income
50℅ - for Needs - groceries, rent, EMI
30℅ - for Wants - entertainment, vacations, etc.
20℅ - Savings - debt MFs, FD, etc.
At least try to save 20℅ of your income, and you can save more.
Thumb Rule 3X for emergencies
Always have at least 3 times monthly income in an emergency fund for emergencies like loss of job, medical contingencies, etc.
3 X Monthly Income
One can have around 6 X Monthly Income in an emergency fund for being on the safer side.
If your monthly income is Rs 4 Lac, have minimum 12 Lac or 24 Lac in emergency fund.
Thumb Rule 40℅ for EMIs
Never go beyond 40℅ of your income into EMIs.
If you are earning Rs 50,000 per month, it would be best not to have EMIs of more than Rs 20,000/month.
Finance companies usually use this rule to provide loans.
Thumb Rule for Life Insurance
Always have an insurance sum assured of 20 times your annual income.
20 X Annual Income
If a person is earning Rs 20 Lacs annually, he should have insurance of Rs 4 crore.
Here insurance means term insurance.
Thumb Rules for investment
Rule no 1: don’t lose money
Rule no 2: don’t forget rule no 1
Please feel free to contact us for customized, better, and most tax-efficient investment returns based on your profile.