Seven rules of money management
In a world where the relentless pursuit of money often feels like a never-ending marathon, it’s easy to forget that finances should be a means to an end, not an end in themselves. Money, the universal lubricant of life’s machinery, can both power our dreams and ignite our nightmares. It can take us to the heights of joy or plunge us into despair. But navigating this vast, complex terrain need not be a heart-pounding rollercoaster ride.
Enter the world of financial rules – simple, elegant guidelines that can transform your financial journey.
But before we dive in, let’s clarify: these rules aren’t rigid commandments. Generally, we hesitate to offer one-size-fits-all solutions. In fact, we often discourage them. The future, with its tantalising uncertainty, refuses to be tamed. Financial rules are more like stars in the night sky, guiding you through the darkness but allowing you to chart your own course.
The first rule is the “6x rule,” a beacon that illuminates the path to financial security. It’s like building a sturdy shelter before you explore the wilderness. Imagine this: before you start investing your hard-earned cash in the stock market’s turbulent waters, you should have a lifeboat ready. This lifeboat is your emergency fund, and the 6x rule is your guide.
Picture this: you’re a regular Jatin, and your monthly expenses clock in at a cool Rs 50,000. The 6x rule tells you to put aside at least six months’ worth of those expenses. So, you multiply your monthly expenses by six – Rs 50,000 x 6 – and you get Rs 3 lakh. That’s the sum you need to stash in your emergency fund. It’s your financial safety net, there to catch you if life throws a curveball.
20x term insurance rule
Now, let’s talk about the “20x term insurance rule.” Life insurance isn’t something we like to dwell on, but it’s a crucial part of a solid financial strategy. Imagine you’re the breadwinner in your family, earning Rs 5 lakh a year. According to the 20x rule, you should consider a life insurance policy that pays out Rs 1 crore if the unthinkable happens. Why Rs 1 crore? It’s simple math: Rs 5 lakh x 20.
Rule of 70
Now, onto the “rule of 70,” a secret weapon against the silent assassin of your wealth – inflation. Inflation is like a sneaky thief that slowly steals the value of your money.
So, how can you estimate when your cash will lose half its purchasing power? The rule of 70 is your answer. If inflation is running at 6 per cent, you divide 70 by six to find out that it will take roughly 11.6 years for your money’s buying power to halve. Armed with this knowledge, you can make smart investment choices to beat inflation at its own game.
Rule of 72
Speaking of investment, let’s meet the “rule of 72.” This rule is your crystal ball for foreseeing when your investments will double in value.
Imagine you’ve parked Rs 10,000 in an investment that earns you 12 per cent annually. Just divide 72 by that 12, and you’ll see that your money will double in about six years. That initial Rs 10,000 will become a magical Rs 20,000.
Now, let’s shift gears and meet the “100-age rule.” It’s a bit like picking the right ingredients for a recipe. In this case, your assets are the ingredients, and the recipe is your financial future.
The rule is straightforward – subtract your age from 100, and that’s the percentage of your savings you should invest in riskier assets like equities. So, if you’re an energetic 32-year-old, the rule says you should invest about 68 per cent of your savings in the stock market, and the remaining 32 per cent in safer assets, like debt mutual funds or FDs.
Retirement can be a complex maze, but this rule is your trusty compass. It whispers that you might be ready to kick back and enjoy the fruits of your labour when your savings hit 25 times your annual expenses. If you spend Rs 10 lakh a year, you’ll want to aim for a retirement nest egg of Rs 2.5 crore. That’s Rs 10 lakh x 25. This isn’t a strict deadline but more like a milestone to guide your journey.
4 per cent withdrawal rule
After years of diligent saving, you’ll reach the golden shores of retirement. But how do you make sure your savings last a lifetime? Here’s where this rule steps in.
Imagine you need Rs 10 lakh annually to live your dream retirement. If you’ve saved up Rs 2.5 crore, you can safely withdraw 4 per cent of that every year, which is Rs 10 lakh. The rest of your money keeps growing, like a fine wine getting better with age.
The final word
Now, you might be thinking, “What if my situation is unique? Can these rules apply to me?” Well, the beauty of these rules is that they’re adaptable. They’re like a Swiss Army knife in your financial toolkit – versatile and handy. Your financial journey is unique, and these rules are your trusty companions, offering direction but allowing you to carve your path.
So, the next time you’re faced with a financial crossroads, remember these rules. They’re your North Star, your guiding light in the maze of money. With them, you can turn the chaos of finances into an exciting adventure, a journey to financial well-being, and ultimately, the freedom to chase your dreams.