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September 6, 2011
In life people want shortcuts I think thats the reason rules of thumb find some place in once life. These financial planning rules of thumb are very basic & not at all full-proof as requirement of 2 different people can never be same. They can just give you some idea but important financial decisions should not be taken on basis of these. Editor of The Journal of Financial Planning (US), once noted that Rules of thumb are for people who want to decide things without thinking about them. But still it will be unfair to suggest ignoring all of them.
Indians are great savers sorry Indians were great savers. New generation is in some different mood they would like to enjoy the present & have no idea about future. If you have just started to work & would like to have a very simple lifestyle & retirement at age of 60 you can do it with saving (read investing) 10% of your income. If you are planning for an early retirement start with 20% savings. Other rule says if you are in early 30s Save 10% for basics, 15% for comfort, 20% to escape. If you are late by decade add 5% more in each category.
Value of car should not be more than 50% of the annual income of the owner. Purchase a used car or buy a new & use it for 10 years. While buying car with loan stick to 20/4/10 Minimum 20% down payment, loan tenure not more than 4 years & EMI should not be higher than 10% of your income.
9. In how many years my amount will double? Its a very simple & most common rule if you divide 72 by rate of return you will get the number of years in which your money will double. For Eg. If you expect a rate of return of 12% you money will double in 6 years (72/12=6) & what about if rate of return is 8% 72/8=9 years. This can also be used in reverse order at what rate your money will double in 5 years 72/5=14.4% Rules similar to rule of 72: Rule of 114 & 144 These can help you in how many years your money will be triple (114) or quadruple (144) at some rate of returns. Rule of 70 You know it or not but inflation is your biggest enemy rule of 70 will tell you in how many years value of money will be half. You just need to divide 70 with rate of inflation so if rate of inflation is 7% 70/7=10 years. So in 10 years your Rs 100 note will be worth Rs 50. 10. Rule 10/5/3 This is a US rule of thumb which says in long term you can get 10% return from equity, 5% return from bonds (lets say FDs) & 3% from the t-bills (liquid funds these returns are more or less close to the range of inflation). Indian economy is growing at some different pace & even inflation numbers are different. Can we safely say if inflation is 6% (t-bill rates) we can get 8% from the fixed deposits & 12% from the equity or in other words in long term equities will deliver twice the return of inflation. Try combining Rule of 72 with this rule you will get some amazing numbers. Some time Rules of thumb will give you false sense of security or wrong guidance so take them with pinch of salt. If you heard of some other rules of thumb related to money/finance must share. Also share your personal views/experience on any of the above rules.