Some Unknown Personal Finance Thumb Rules Every Individual Must Be Aware of

Is managing your finances difficult?

Personal finance is a very taboo topic. People usually don’t discuss it. Personal finance is not only about managing own money, but it teaches us to be disciplined and puts value to our money. Below are some of the known unknown rules of personal finance everyone should be aware of.

1) Net-worth rule: The first and foremost rule:

This personal finance technique will help you in finding your net worth in monetary terms, which will help you in making any financial decisions.

Use this formula to know whether you have enough net-worth = (Current age*pre-tax income) divide by 10

For Example: Age = 25, Pre-tax income = 7.5 Lakh p.a.,

Net worth = (25*750000)/10 = Rs. 18,75,000

2) 3x Rule:

The value of your home should not be more than 2.5 to 3 times your gross annual income. These will help us in taking a calculated risk and will give a clear picture of our dream house.

For Example: Gross annual income = 9 Lakh p.a.

Thus, house value should be between 22.5 to 27 lakhs

3) The rule of EMI:  

EMI shouldn't exceed 35% of your Gross income. Loans should always be as low as possible. I would personally suggest you to keep it Nil.

For Example: Monthly income = Rs. 50,000

Thus, the maximum EMI should never exceed Rs. 17,500 per month, i.e. 35% of monthly income.

4) Student Loan rule:

A student loan is a necessity for people who can’t afford education and one should look at various parameters before applying for it.

If you avail student loan, the loan amount shouldn't exceed your 1st annual salary post-education. (Take a wise decision)

5) 20/4/10 Rule:

The above rule would seem as if it is a date but this rule applies to the ones who are planning to buy a Car.

While availing Car Loan, keep a minimum 20% as Down payment, the term of the loan shouldn't be more than 4 years, and most importantly, make sure EMI doesn't exceed 10% of your income.

6) 20x Corpus Rule:

Ever wondered what amount should you keep aside to retire stress-free and live your rest of life independently.

Ideally, this rule says you should save 20 times your annual income as a retirement corpus.

For Example: Gross annual income = 9 Lakh p.a

Thus, Retirement Corpus = 9 * 20 = Rs. 1.8 Crore

7) 4% Rule: Rule of easing your expense

This rule suggests that you should withdraw 4% every year from your retirement corpus to maintain your standard of living.

This rule helps you in maintaining the balance between lifestyle and expense

 8) The 6× Emergency Rule:

After this corona pandemic, you must better understand, how important is an emergency fund and we all should maintain it to survive through tough times.

This rule says an emergency fund should be 6 times your monthly expenses, I would personally suggest you, keep it between 6 times to 12 times.

9) The 10× Life Rule:

Life insurances are very important as life is unpredictable and you should secure the lives of your loved ones so that they won’t face any difficulties even if you are not there with them.

Insurances should never be looked at as an investment. Buy a good term life insurance if possible.

The rule says you should have life insurance 10 times your gross annual income.

10) 120 minus age Rule:

This rule is one of my favorites and gives an idea of “how an individual should manage his risk?”

This rule is for those who are willing to invest in the equity market and earn excess returns but are always confused while diversifying their portfolio.

This rule says, your equity allocation from the total portfolio should be 120 minus your current age.

For Example: Age = 25,

Thus my approx. investment in equity securities should be around = 120 – 25 = 95%

11) 50/30/20 Rule:

Every salaried person might have heard about this at some point in his life most probably from his family or friends on how he should utilize his income? And make the best use it.

This rule says, from total income, allocate 50% towards your needs, 30% towards your wants and 20% towards your savings

*Here “needs” mean necessity like food, clothes, and shelter, and “wants” refers to luxury like spending on vacation, purchasing luxury products, etc.

12) Rule of 72:

This rule gives us the answer to the question “How long will it take to double my investment”

The simple formula to find out is: - Divide 72 by rate of return, you will know in how many years your investment will double.

For Example: If a man has invested a sum of 50,000 in a fixed deposit at a rate of 8.5% p.a.

Then we can find the period to double the investment by = 72/8.5 = 8.47 years i.e. 

Our investment will be worth 1,00,000 by the end of 8.47 years.

Disclaimer: Though these rules are theoretical, the best personal finance is up to us. Be disciplined

If you found my article useful then do comment your views and share it with all your family and friends. 

Let’s spread financial literacy together.

Thanks for reading.

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