10 Personal Finance Rules Millennials Should Follow

The term ‘Personal Finance’ has become a buzzword these days, and is frequently used by many people in regards to individual or family spending and savings. Personal finance refers to the astute management of finances such as budgeting, saving, and spending monetary assets and wealth by an individual or family, taking into account various financial risks and future events. Millennials especially need to monitor their finances to thrive in a world of competition and uncertainty.

Some personal finance rules that everyone should follow to regulate and control their personal finances are:

Use the Rule of 72 to know the time needed to double your income

Everyone wants to double their income and increase their savings. To find the number of years it takes to double your money, you divide the number 72 by the annual interest rate. For example, if you want to know how long it will take for your money to double at 8% interest, you would divide 72 by 8 to get 9 years. Similarly, at a 6% rate, it will take 12 years and at a 9% rate, it will take 8 years. This will help people gauge the amount of time it takes to see their salary double and prepare their expense charts accordingly so they don’t have to deal with running out of money.

Apply the Rule of 70 to check the depreciation rate of your investment

An important aspect of personal finance is monitoring the depreciating value of your investment so you can decide whether or not it is profitable. You can divide 70 by the current rate of inflation to calculate how quickly the value of your investment will drop to half of its current value. It will help you understand if an investment is an asset or a liability. For example, an inflation rate of 7% will cut the value of your money in half in 10 years.

Put 50% of income in fixed income and 50% in stocks

To manage your personal finances, it is a main concern to divide your income into two parts so that you do not get involved in waste and extravagance. You must put 50% of your salary in fixed income and 50% in shares, which leads to the segregation of your income. Now, withdraw 4% from your bank annually. This rule works 96% of the time over a 30 year period.

Stock allocation rule: 100 minus your age rule

Asset allocation is made on the basis of this principle. This rule states that people must own a percentage of shares that is equal to 100 minus their age. So subtract your age from 100 to find out how much of your portfolio should be allocated to stocks.

Suppose your age is 30 so (100 – 30 = 70)

Equity: 70%
Debt: 30%

But if your age is 60 then (100 – 60 = 40)

Equity: 40%
Debt: 60%

Asset allocation rule: 10-5-3 rule

The asset allocation or 10-5-3 rule says that the annual return on stocks is likely to be 10%, the rate of return on bonds is likely to be 5%, and cash (as well as liquid investments similar to cash) is 3%. Therefore, it is recommended that one should have reasonable return expectations on stocks.

10℅ Rate of Return: Stocks/Mutual Funds
5℅ – Debts (Fixed-Term Deposits or Other Debt Instruments)
3℅ – Savings Account

Rule 50-30-20: on the allocation of income to expenses

This rule can be applied to branch your spending for different purposes and monitor so that one does not overspend and control their budgets and personal finances.

Splitting your income into three parts will help you channel your flow:-

50℅ of your earnings should be dedicated to your necessities (groceries, rent, emi, etc.)
30℅ of your salary should go towards your needs and wants (entertainment, vacations, etc.)
20℅ of your remuneration must be reserved for your savings (Equity, MFs, Debt, FD, etc).

This is not a hard and fast rule, you can definitely save more by exercising moderation when it comes to reckless spending.

3X emergency rule

Considering the adverse incidents of the future, people should always put at least 3 times their monthly income in Emergency funds in case of exigency caused by job loss, medical emergency, etc.

3 X Monthly Income

To be on the safer side of things, individuals should set aside six times their monthly income in liquid or near-liquid assets to ensure income stability and non-reliance on other sources.

40℅ EMI rule

As many financial experts suggest, people should never cross the threshold of investing 40℅ of their income in EMI. If a person earns ₹50,000 per month, he should not have EMI of more than ₹20,000. It is a general criteria rule followed by finance companies to sanction loans, but people can use it to manage their finances.

life insurance rule

The life insurance rule can also be used to regulate personal finances. To assess the minimum sum insured in term life insurance, the best way to calculate is 10 times annual income, which means that if your current annual salary is ₹10 lakh, you should have life insurance coverage of at least ₹1 crore.

(By Kumar Binit, Founder and CEO, FinMapp)

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