Following are the thumb rule of finance
Rule 114
Number of years to triple (3 times) money = 114 / rate of return
Example
If rate of return is 6 % p.a. then here we calculate how many years to take it to triple your money.Number of years to triple money = 114 / 6 then it will take approximate 19 years to triple your money.So if you earn 6% interest rate then it will take 19 yrs to triple your money.
Rule
No.of years to 4 times of money = 144 / rate of return
Example
If the rate of interest is 6% p.a. then how many years it will take to 4 times of our money.No.of years to 4 times of money = 144 / 6%, then your money will be 4 times in 24 years.If you have invested Rs. 1 Lac @ 6% p.a. then it will take 24 years to 4 times Rs. 4 Lac.
Rule
The maximum value of a new house = 2.5 X Annual Income.
Example
Let us say the annual income is 10 Lac. The maximum value of the house should be less than 25 Lac (10 X 2.5)This is just rule and in the current scenario where property prices are higher so you need to increase it according to your EMI paying capacity.
Rule
Monthly Housing loan EMI = 28% of gross monthly income
Example
If you earn Rs.50,000/- per month, then your monthly home loan EMI should not exceed Rs. 14000/- p.m.
Rule
Rule
Minimum monthly savings amount = 10% of Gross monthly income.
If you earn Rs.50,000/- P.M. then minimum you should save Rs. 5000/- per month for your retirement. This is the minimum amount, ideally, you should try to save 20% of your monthly income.
Rule
Retirement corpus amount = 20 X Gross Annual Income.
Example
Let us say your annual income is 5 Lac then your retirement corpus should at least be 1 Cr. (5 Lacs X 20).
10) Finance Rule –100 minus age rule
This rule says tell an investor what portion of his portfolio should be in equities. The logic is that when you are younger you can take more risk because you have a long time horizon.
Rule
% of the portfolio in equity assets = (100 – your age)
Example
If you are 30 years old then the suggested percentage of allocation to equities would be 70% (100 – 30).
Conclusions:
These rules give you an approximate value and saving and investment are vary from person to person, this rule just gives you a general and it is only for education purpose.
The Finance Gyan has tried to cover maximum rule, please comment if you know any other finance thumb rule.
1) Rule of Finance – Rule of 72
Rule 72 is used to estimate the number of years it would take to double your investment given your expected rate of return.
This is the simplest way to know that when the invested amount will be double, you need not apply compound interest formula.
Rule
Number of years to take double = 72 / expected rate of return
Example -1
For example, the Rule of 72 states that Rs.1 Lac invested at an annual fixed interest rate of 10%, then it would take 7.2 years ((72/10) = 7.2 to grow to Rs. 2 Lac.A number of years to take double = 72 / 10 %, then it will take approximate 7.2 years to take double the money.
Example -2
If someone wants to know that on how much interest rate required to double my money in 6 years, then you can calculate with help of rule 72 as:Return required % = 72 / 6 years = 12%.If someone gets 12% p.a return, then his money will be double in 6 yrs.
Rule
Number of years to take double = 72 / expected rate of return
Example -1
For example, the Rule of 72 states that Rs.1 Lac invested at an annual fixed interest rate of 10%, then it would take 7.2 years ((72/10) = 7.2 to grow to Rs. 2 Lac.A number of years to take double = 72 / 10 %, then it will take approximate 7.2 years to take double the money.
Example -2
If someone wants to know that on how much interest rate required to double my money in 6 years, then you can calculate with help of rule 72 as:Return required % = 72 / 6 years = 12%.If someone gets 12% p.a return, then his money will be double in 6 yrs.
2) Finance Rule – Rule of 114
Just like to the rule of 72, rule 114 is used to estimate the number of years it would take to triple your money by giving the rate of return.This is the simplest way to know that when the invested amount will be triple (3 times), you need not apply compound interest formula.Rule 114
Number of years to triple (3 times) money = 114 / rate of return
Example
If rate of return is 6 % p.a. then here we calculate how many years to take it to triple your money.Number of years to triple money = 114 / 6 then it will take approximate 19 years to triple your money.So if you earn 6% interest rate then it will take 19 yrs to triple your money.
3) Finance Rule – Rule of 144
This rule is used to estimate the number of years it would take 4 times the amount given the expected rate of return.This is the simplest way to know that when the invested amount will be triple (3 times), you need not apply compound interest formula.Rule
No.of years to 4 times of money = 144 / rate of return
Example
If the rate of interest is 6% p.a. then how many years it will take to 4 times of our money.No.of years to 4 times of money = 144 / 6%, then your money will be 4 times in 24 years.If you have invested Rs. 1 Lac @ 6% p.a. then it will take 24 years to 4 times Rs. 4 Lac.
Another Reading: Top 5 investment options which will make you rich in India
4) Finance Rule – House Affordability rule
This rule helps the home buyer decide on the maximum amount they can spend on buying a new house. It helps to decide the purchase price of new house.Rule
The maximum value of a new house = 2.5 X Annual Income.
Example
Let us say the annual income is 10 Lac. The maximum value of the house should be less than 25 Lac (10 X 2.5)This is just rule and in the current scenario where property prices are higher so you need to increase it according to your EMI paying capacity.
5) Finance Rule- 28% Housing EMI rule
This rule says that the maximum amount one can pay for housing loan monthly EMI payments.When you purchase a new house on loan, then you must aware that maximum EMI you should consider.Rule
Monthly Housing loan EMI = 28% of gross monthly income
Example
If you earn Rs.50,000/- per month, then your monthly home loan EMI should not exceed Rs. 14000/- p.m.
6) Finance Rule –36% Debt rule
This rule says that the maximum amount one can pay for debt loan monthly EMI payments.This is total EMI on your all loans, including credit card EMI also where you convert your purchasing in EMI.Rule
Monthly EMI payments = 36% of gross monthly income
Example
If your salary is Rs.50,000/- a month than the total of all your monthly loan EMI’s should not exceed 18,000 per month.You should try to reduce your loan EMI because your EMI reduces your savings.
Example
If your salary is Rs.50,000/- a month than the total of all your monthly loan EMI’s should not exceed 18,000 per month.You should try to reduce your loan EMI because your EMI reduces your savings.
Another Reading: How To Use Credit Cards Wisely?
7) Finance Rule –Emergency Fund rule
This rule says the amount a person needs to keep aside in a liquid asset like cash, saving account balance or FD for any emergencies like loss of jobs, illness, business downturn, etc.One should not forget this rule because when you face a job loss or business downturn, then this fund will help you to pay your EMI and household expenses.
Rule
Emergency Fund required = 6 X Monthly household expenses including EMI
Example
Let us say your monthly EMI and household expenses add is Rs. 25,000 then your emergency fund should be ideally 1,50,000.
Rule
Emergency Fund required = 6 X Monthly household expenses including EMI
Example
Let us say your monthly EMI and household expenses add is Rs. 25,000 then your emergency fund should be ideally 1,50,000.
8) Finance Rule –10%, saving rule
This rule talks about the amount we need to save per month for our retirement. Higher the saving higher will be your retirement corpus.Rule
Minimum monthly savings amount = 10% of Gross monthly income.
If you earn Rs.50,000/- P.M. then minimum you should save Rs. 5000/- per month for your retirement. This is the minimum amount, ideally, you should try to save 20% of your monthly income.
9) Finance Rule – Retirement Corpus rule
This rule says about the retirement corpus amount you need to accumulate before retirement to have a peaceful and financially stress-free retirement life.Rule
Retirement corpus amount = 20 X Gross Annual Income.
Example
Let us say your annual income is 5 Lac then your retirement corpus should at least be 1 Cr. (5 Lacs X 20).
Another Reading: Planning For Early Retirement? Here’s How You Can Make That Happen
10) Finance Rule –100 minus age rule
This rule says tell an investor what portion of his portfolio should be in equities. The logic is that when you are younger you can take more risk because you have a long time horizon.Rule
% of the portfolio in equity assets = (100 – your age)
Example
If you are 30 years old then the suggested percentage of allocation to equities would be 70% (100 – 30).
Conclusions:
These rules give you an approximate value and saving and investment are vary from person to person, this rule just gives you a general and it is only for education purpose.
The Finance Gyan has tried to cover maximum rule, please comment if you know any other finance thumb rule.
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