10 Investing Thumb Rules

10 investing thumb rules

 

Back of the envelope calculations may not be accurate to the last decimal but they give you a fair idea of what you are looking for.

 

Here are some immutable financial rules that can help you with quick estimates.

 

Use them to get a grip on your finances and make informed investment decisions.

 

How fast will your money grow

Rule of 72: This tells you in how much time your money will 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.

If the interest rate is 9%, then your money will double in:

(72/9=8) 8 years

 

Rule of 114: Use this to estimate how long it will 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 Rs 10,000 will become Rs 30,000.

 

Rule of 44: Similarly, this tells you in how much time your investment will quadruple in value.

For instance, if the interest rate is 12%, Rs 10,000 becomes Rs 40,000 in 12 years.

 

How fast will your corpus erode

Rule of 70: This is a useful rule for predicting your future buying power. Divide 70 by the current inflation to know how fast the value of your investment will get reduced to half its present value.

 

This is especially useful for retirement planning, as it affects the way you set up your monthly withdrawals. However, do remember that inflation varies from time to time.

 

Inflation of 7% will reduce the value of your money to half in

(70/7 = 10) 10 years

 

The other rules

The 10, 5, 3 Rule: This is a neat little rule that states that you can expect returns of 10% from equities, 5% from bonds and 3% on liquid cash and cash-like accounts.

 

Pay yourself first 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.

 

100 minus your age rule: This rule is used for asset allocation. Subtract your age from 100 to find out how much of your portfolio should be allocated to equities.

 

The emergency fund rule: Put away at least 3-6 months' worth of expenses in a liquid savings account to ensure it is available at a short notice.

 

If every month you invest Rs 5,000 in a plan that grows 8.5% annually and increase your investment by 10% every year, after 30 years, you will have Rs 2.5 crore.

 

4% withdrawal rule: How much should I withdraw during retirement? We often use the 4% rule to protect the principle and determine how much one can take from the retirement savings.

 

If every month you withdraw, Rs 50,000, you need a corpus of Rs 1 crore to sustain monthly withdrawals for the next 25 years if the corpus earns 9% and inflation is 6%.

 

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