Top 10 thumb rules in finance

1) The Age Rule for Stocks:

Generally, stocks are considered as a riskier asset. So, the older you get, the less you should invest in stocks. That’s because older people have less time to recover from the stock market.

Just subtract your age from 100 (but many experts now say that 120 makes more sense). That’s the percentage of your portfolio that should be invested in stocks.


2) The Age rule for Bonds:

Generally, bonds are considered as a conservative investment. Hence, the percentage of your portfolio invested in bonds should equal your age.

This rule of thumb helps investors keep in mind that their portfolios need to change as the age, becoming more focused on avoiding risk in their investing.

3) The stock market has a long-term average return of 10%.

4) 10% retirement rule: Right from your first salary, put away a little for your retirement. Experts say 10% of your income should go into this. It is important to increase the amount as your income rises over the years.

5) The Emergency Fund rule: Your emergency fund should equal six months’ worth of household expenses.

 When misfortune strikes in the form of a job loss or illness, having a financial cushion is key. As this down economy has proven, unemployment can last an unexpectedly long time, and be having a six-month cushion can allow you to keep bad financial outcomes until you can find a new job.

6) Rule of 72

Rule of 72 is a method for estimating an investment’s doubling time. This Rule tells you in how much time will your money double. Divide 72 by the interest rate you are compounding your money with and you will arrive at the number of years it will take to double in value.

For example,

If the compound interest is 10% then, your money will double in 72/10=7.2 years.

7) Rule of 114

Rule of 114 is used to estimate how long will it take to triple your money. It works the same way as the rule of 72. Divide 114 by the interest rate to know in how many years your money will grow by three times.

For example;

If you are investing Rs.5000 & the compound interest is 10%, then your money will become 15,000 (triple) in 114/10= 11.4 years

Note: Some experts are using 115 instead of 114.

8) Rule of 144

Rule of 144 tells you in how much time will your investment quadruple (4 times) in value.

For example;

If you are investing Rs.5000 & the compound interest is 10%, then your money will become 20,000 (quadruple) in 144/10= 14.4 years

9)  Rule of 28/36

The 28/36 Rule states that a household should spend a maximum of 28% of its gross monthly income on total housing expenses and no more than 36% on total debt service, including home loan and other debt such as car loans. This rule is usually used by mortgage lenders and other creditors to assess borrowing capacity.

10) Rule of 70

This rule is a used for predicting the future value of your money. Divide 70 by the current inflation rate to know how fast will the value of your investment get reduced to half of its present value. This is especially useful for retirement planning. For example,

Assume that current inflation rate is 6 %, then value of your investment get reduced to half of its present value in 70/6= 11.66 years

Note: However, do remember that the inflation rate varies from time to time.

These rules are a good starting point, but to really stay on top of your finances, research and personalized planning is a necessity.

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