Investing is a crucial aspect of financial planning. It helps you grow your wealth and achieve your financial goals. However, investing can be overwhelming, especially if you are new to it. That’s where thumb rules come in handy. Thumb rules are simple guidelines that can help you make informed investment decisions. Here are seven thumb rules for investing which can help you achieve your financial goals with ease.
What is a Thumb Rule?
A "thumb rule" (often spelled "rule of thumb") is a general guideline or rough estimate that is based on practical experience rather than precise measurement or calculation. It is a quick and easy way to make approximate judgments or decisions, especially in situations where a more precise or detailed approach is not necessary or feasible.
Thumb Rule #1: Rule of 72
The Rule of 72 is a simple formula that helps you estimate the time it takes for your investment to double. To use this rule, divide 72 by the expected rate of return on your investment. The result is the number of years it will take for your investment to double.
For example, if you invest Rs. 2,00,000 with an expected rate of return of 8% per annum, your investment will double in approximately 9 years (72/8). This rule is applicable to investments that offer compound interest like FDs, etc.
You can also apply the Rule of 72 to determine the necessary interest rate for your investment to double within a specific time frame. For instance, if your goal is to double your investment in 6 years, you can calculate it as follows:
Doubling Time = 72 / Rate of Return
This means the required Rate of Return is 72 / Doubling Time, which translates to 72 / 6, resulting in an annual interest rate of 12%.
Thumb Rule #2: Rule of 114
The Rule of 114 is similar to the Rule of 72 but helps you estimate the time it takes for your investment to triple. To use this rule, divide 114 by the expected rate of return on your investment. The result is the number of years it will take for your investment to triple.
For example, if you invest Rs. 2,00,000 with an expected rate of return of 8% per annum, your investment will triple in approximately 14.25 years (114/8).
In case you aim to triple your investment over 8 years:
Tripling Time = 114 / Rate of Return
This implies that the required Rate of Return can be calculated as 114 divided by the Doubling Time, which, in this scenario, would be 114 divided by 8, resulting in an annual interest rate of 14.25%.
Read Also: When is the Right Time to Invest in a Fixed Deposit
Thumb Rule #3: Rule of 144
The Rule of 144 is similar to the Rule of 72 and Rule of 114 but helps you estimate the time it takes for your investment to quadruple. To use this rule, divide 144 by the expected rate of return on your investment. The result is the number of years it will take for your investment to quadruple.
For example, if you invest Rs. 2,00,000 with an expected rate of return of 8% per annum, your investment will quadruple in approximately 18 years (144/8). Remember this applies in the case of investments which offer compound interest.
In case you aspire to quadruple your investment over a 10-year period:
Quadrupling Time = 144 / Rate of Return
This means that you can calculate the required Rate of Return by dividing 144 by the Doubling Time, which, in this context, is 144 divided by 10, resulting in an annual interest rate of 14.4%.
Thumb Rule #4: Minimum 10% Investment Rule
The Minimum 10% Investment Rule suggests that you should invest at least 10% of your income every month towards long-term investments, while also increasing your investment by 10% each year.
For example, if your monthly income is Rs. 50,000, you should invest at least Rs. 5,000 every month towards long-term investments.
Thumb Rule #5: 100 minus Age Rule
The 100 minus age guideline offers a framework for determining the appropriate equity and debt allocation in your investment portfolio. It suggests subtracting your age from 100 to find the suitable percentage of equity or stocks exposure. The remainder can then be allocated to debt instruments.
This rule is based on the assumption that as an individual approaches retirement, their allocation to equities should decrease.
For instance, if you are 35 years old and embarking on your investment journey, the 100 minus age rule would guide your portfolio allocation as follows:
Equity: 100 - 35 = 65%
Debt: 35%
Thumb Rule #6: Emergency Fund Rule
The Emergency Fund Rule suggests that you should have an emergency fund that can cover at least three to six months’ worth of expenses.
For example, if your monthly expenses are Rs. 50,000, your emergency fund should be at least Rs. 1.5 lakh to Rs. 3 lakh. This amount should ideally be quite liquid, and easily accessible in case of an emergency.
Read Also: How to Invest in Fixed Deposit (FD) Online
Thumb Rule #7: 4% Withdrawal Rule
Many individuals strive to save for their retirement and build a corpus that will provide for them throughout their lifetime. However, due to the unpredictability of inflation rates, there exists a risk of depleting this corpus prematurely. The 4% Withdrawal Rule is intended for retirees to ensure a consistent income source without depleting their savings too rapidly.
According to this principle, withdrawing 4% of your retirement corpus each year should suffice to cover your living expenses. For instance, if you possess a retirement fund of Rs. 1 crore, adhering to this rule means you should limit your annual withdrawal to no more than Rs. 4 lakh in order to effectively manage your living costs.
For example, if your retirement corpus is Rs. 2 crore, you can withdraw up to Rs. 8 lakhs every year without depleting it.
Key Takeaways
These seven thumb rules offer a structured approach to building wealth, making informed financial decisions, and securing your financial future. While they provide valuable guidance, it's essential to adapt them to your specific financial goals and risk tolerance.
Tips!
In addition to these thumb rules, here are some other tips for investing in the Indian financial market:
- Diversify Your Portfolio: Diversification helps reduce risk by spreading out investments across different asset classes such as FDs, Mutual Funds, stocks, etc
- Invest for the Long Term: Investing for the long term helps reduce risk and allows compounding to work its magic. You can opt for an FD from Bajaj Finance (tenures ranging from 12 to 60 months).
- Keep Your Emotions in Check: Investing can be emotional but making decisions based on emotions can lead to poor investment choices.
- Stay Informed: Keep yourself updated with the latest news and trends in the financial market.
What are the benefits of using the thumb rules of investment?
Thumb rules of investment are general guidelines that can provide a quick and simple way for individuals to make decisions about their investments. While they are not precise or tailored to specific circumstances, they can offer some benefits, especially for those who are new to investing or looking for easy-to-remember principles. Here are some potential benefits of using thumb rules of investment:
- Simplicity: Thumb rules are straightforward and easy to understand, making them accessible to a wide range of investors, including those without a deep understanding of financial markets.
- Quick Decision-Making: These rules provide a rapid way to assess investment opportunities and make decisions without the need for extensive analysis. This can be useful for individuals who prefer a more hands-off or less time-intensive approach to investing.
- Risk Management: Some thumb rules incorporate risk management principles, helping investors establish a basic framework for diversification and asset allocation. This can contribute to a more balanced and diversified investment portfolio.
- Starting Point: Thumb rules can serve as a starting point for investors to develop a basic investment strategy. While they may not be sufficient for a comprehensive plan, they can provide a foundation that individuals can build upon as they gain more knowledge and experience.
Navigating the Indian financial market can be a daunting task, but these thumb rules offer clarity and direction. By diligently following these principles, you can grow your wealth, plan for retirement, and overcome financial challenges with confidence. Remember that financial planning is a dynamic process, and these thumb rules are your reliable companions in achieving your financial aspirations.
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