A rule of thumb refers to something that can be easily learned and easily applied to a situation. These rules are mostly based on practical experience and are present everywhere, including investing. So, in this article, we look at 11 popular thumb rules that you can use in growing, saving, and managing your money. Let’s begin with the first one: the rule of 72.

The rule of 72.

The rule of 72 helps you estimate when your money will double. For instance, let’s say you invest your money in a perpetual fixed deposit that offers an annual interest of six percent. To know when your money will double, simply take 72 in the numerator and divide it by 6 percent. This comes to 12, which means your money will double in 12 years. You can also reverse this rule to determine how much return you need from a financial instrument to double your money.

For example, if you want to double your money in five years, again, use 72 in the numerator and divide it by five. The answer comes to 14.4, which means you need to invest money in something that gives you an annual return of roughly 14.4 percent over the next five years to double your money. And that’s the rule of 72.

The rule of 114.

Much like the rule of 72, the rule of 114 gives you an estimate of how much time it will take for you to triple your money. For instance, if you were to invest 1 lakh rupees in a product that can deliver 12 percent annual returns, then per the rule of 114, this 1 lakh will become 3 lakhs in about 9 and a half years. In fact, here’s how you can use the same example and extend it:

If one lakh becomes three in ten years, then one lakh becomes 3 raised to the power 2 in 20 years, so 1 lakh becomes 9 lakhs in 20 years. So, in 30 years, it’s 3 raised to the power 3, so 27 lakhs, and in 40 years, it’s 3 raised to the power 4, so that’s 81 lakhs.

This effectively means that if you gift 12 lakhs to your child on his or her 20th birthday and invest in an instrument that makes 12 percent for the next 40 years, then that’s like giving your child a 10 crore retirement present.

The 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 the 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 is today.

For instance, let’s say you have accumulated 50 lakhs and the long-term inflation for India is estimated at 5 percent. Going by the rule of 70, we have 70 divided by 5, which comes to 14. This means the real worth of your 50 lakhs, after adjusting for inflation, would halve down to 25 lakhs in 14 years from now. So, 50 becomes 25 in 14 years, and that’s the rule of 70.

10-5-3 Rule

A primary 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 a 10 percent annual return from equities, a 5 percent yearly return from debt instruments, and a three percent analyzed return from your savings bank account. Of course, like any thumb rule, these numbers are not guaranteed, but this 10-5-3 rule does give you a workable and slightly conservative premise for your long-term estimations.

100 minus age rule

The 100 minus age thumb rule 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.

For example, if you are 30 years of age, then 100 minus 30, which means 70%, should be in equities, and the remaining 30% should be in debt. Of course, this rule does have some shortcomings. For instance, it does not take into account different types of goals you might have or your risk profile. But on the whole, a thumb rule like this is better than having none at all. So, if you’re clueless about your asset allocation strategy, then start off with the 100 minus age rule.

4% withdrawal rule

The four percent withdrawal rule is a post-retirement thumb rule that helps you determine how long your retirement fund will last. According to the rule, if you have accumulated X amount of money at retirement, then you should withdraw only four percent of this X amount every retirement year.

For instance, if you have a one crore retirement corpus, then you should withdraw not more than four lakhs per year or 33,000 rupees every month. This way, you can be assured that in most scenarios, you will not run out of money in your lifetime. Of course, I should mention that this rule was created way back in 1994 when inflation and treasury yields in the United States were much higher than what they are today.

The four percent rule does not work well in today’s times, and definitely, the dynamics for a developing country like India are much different from other developed countries. But if you come across a modified version of this thumb rule, then do give it a shot and let us know in the comments box below.

The 50-30-20 rule

The 50-30-20 rule is one of the most commonly used thumb rules by financial planners. The ratio aims to divide your income into a spending and saving cycle by recommending how much you should spend from your monthly income on living expenses like rent, groceries, electricity, etc., how much you should spend on discretionary expenses like eating out, movies, gifts, gym membership, and so on, and finally, how much you should save and invest.

This ratio is ideally 50-30-20, which means 50 percent of your income on living expenses, 30 percent on discretionary expenses, and the remaining 20 percent is saved and invested. Of course, this is not a hard and fast rule, and if you can save more than 20 percent, then you’re most welcome to do that. Also, this ratio is a basic guideline to better manage your money. So, depending on your life stage, income, and life priorities, you may want to fine-tune this ratio to achieve the best results for yourself.

The 3x emergency fund rule

The 3x emergency fund rule is rather simple. It says that one should keep at least three times their monthly income in an emergency fund at all times. Of course, this is the bare minimum, and you can go up to six months and keep building if you feel the need to do so. The purpose of this fund is to keep you financially stable in case of emergencies like loss of employment, urgent travel, repairs, a medical emergency, etc. An excellent way to manage your emergency fund is to invest your money in liquid funds and allows 24×7 daily withdrawals of up to 50,000 rupees a day. It’s a super-efficient way of managing your emergency fund and is used by tens of thousands of our investors.

1 week spending rule

When the Amazon website says, “Customers who bought this also bought,” it is not doing you a favor but is trying to get you to commit the biggest sin of them all, and that is impulse spending. The pricing, promotion, packaging, previous purchase history, signages, category placement, are all modified and manipulated to get you to buy more than what you actually need. And perhaps that’s why the one-week spending thumb rule is highly recommended.

The rule says, if something shiny, something new were to catch your eye and you feel like buying it, then wait for an entire week before buying it. This hibernation of one week will give you time to think through your decision as you answer some important questions in peace.

Questions like: How useful will this purchase be? What is the return on my investment? How am I living without having this product? Can this money be used elsewhere for something that’s more important? And if after a week, you still feel strongly about the purchase, then you should only go for it. This one-week halt between seeing and buying is a great tool, and if done religiously, it can help you prevent a lot of wasteful expenses.

The 40 EMI rule

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

For instance, if your monthly take-home or post-tax salary is 50,000 rupees, then your combined EMIs should not be more than 20,000 rupees. Again, this is not a compulsion, and no one stops you from going over this 40 percent limit. But it is generally observed that EMIs over 40 percent of one’s take-home salary end up putting significant stress on one’s finances. So, do exercise financial caution when you take loans and do try to stay within the 40 percent limit.

20x life coverage 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, ensure that the sum assured offered to you is at least 20 times your current annual income. Now, some insurance companies might offer 20 times, some might offer 15, but if you are in your 20s and 30s, then strive for 20 times, as this multiplier will ensure adequate financial protection to your family in case of your untimely demise.

I sure hope you like this presentation and will use some of these thumb rules in your day-to-day functioning. In our Rupee Sprout blog, we cover many investing and personal finance topics. So do subscribe our newsletter and do comment your insights in the comment box below.

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