Have you ever played any sport? There is one thing in common in each of them; each has its own rules and techniques. Following these methods, one is set to win, provided he applies his minds and keeps practicing on his shortcomings. Investing is much similar to this. It has its own set of rule and techniques. Today, we will talk about some of these thumb rules that make our investing easier.
1.Rule of 72, 114 and 144
Here, we have combined three rules for easier understanding. These rules tell you how fast your money can grow. If you want to see how fast your money will double, divide 72 by the expected rate of interest on the security. Similarly, if you wish to see how much time it will take to triple or quadruple your corpus, divide 114 and 144 by the expected rate of interest.
Example: If you invest INR 10 Lacs at a 7.2% annual rate of interest, the amount will double itself in 10 years (i.e.,72/7.2)
2.Rule of 70
This rule signifies the purpose of making an investment which is avoiding inflation. Rule of 70 requires one to divide the number 70 by the current rate of inflation. The resultant is the numbers of years, after which your wealth will be worth half of what it is today.
For example: If you have INR 40 Lakhs and the current rate of inflation is 5%. After 14 years (i.e.,70/5) the worth of your corpus will be just INR 20 Lakhs.
3.Emergency Fund Rule
In 2020, around 12.2 Crore people lost their jobs during the coronavirus lockdown. Situations like these are the reason why the creation of an emergency fund is necessary. Keeping aside a 6-to-12-month expense fund aside is said to be a good practice. Putting this idle money into liquid funds can be considered a wise decision. While calculating this fund; one should calculate all the expenses that he will need to pay for even in your worst times. The amount includes EMIs, electricity and water bills, food bills, rent, etc.
4.10 Percent for Retirement Rule
Many people consider saving for their future when they are in their 30’s or 40’s. While there is no better time to start saving than today, planning for investment in the 20’s is the best thing one can do. Thanks to the power of compounding, even a meagre amount can turn up to be a corpus. As a rule, one should invest at least 10% of his monthly income.
For example: If one earns INR 30000 per month and invests INR 3000 per month (10% of INR 40000) and steps it by 10% every year, after 35 years at an expected rate of interest of 10%, this amount shall become a gigantic corpus of INR 3.4 Crore.
5.100 Minus Your Age Rule
This rule is concerned with the allocation of your funds. This rule says that considering that you live a 100 years lifespan, 100 minus your age should be the percentage that you should invest into equity & the rest in debt. This rule suggests asset allocation on your risk. When younger, one has a high risk-taking capacity which reduces, as one grows older.
For example: If you’re 25 years old, 75% (i.e., 100-25) should be invested into equity-oriented stocks, rest should be invested in the debt market.
Rule of thumbs are an easy way approach to learning things. However, they should not be adhered to strictly rather used as a suggestive tactic of doing things and managing your investments.