10 Personal Finance Rules Millennial’s Should Follow

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The term ‘Personal Finance’ has become a buzzword in today’s times, with a lot of people using it frequently with respect to their individual or family’s expenditure and savings. Personal Finance refers to a sagacious management of finances like budgeting, saving and spending monetary assets and wealth by a person or family, taking into consideration several financial risks and future events. Millennials, especially, need to monitor their finances in order to thrive in the world of competition and uncertainty.

Some Personal Finance rules that everyone should follow to regulate and control their personal finances are:-

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

Everybody wants to double their income and increase their savings. In order to know the number of years required to double your money, you need to divide the number 72 by the annual interest rate. For example, if you want to know how long it will take to double your money at 8% interest, you will divide 72 by 8 and get 9 years. Similarly, at 6% rate, it will take 12 years & at 9% rate, it will take 8 years. This will help people to gauge the amount of time needed to see their salary doubling and prepare their spending charts accordingly so that they do not have to deal with money scarcity.

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

An important aspect of personal finance is to oversee the depreciation value of your investment so you can decide whether it is profitable or not. You can divide 70 by the current inflation rate to calculate how fast the value of your investment will get reduced to half of its present day value. It will help you in understanding whether an investment is an asset or a liability. For example, inflation rate of 7% will reduce the value of your money to its half in 10 years.

3. Put 50% of income into fixed income & 50% into equity

To manage your personal finance, it is a primary concern to divide your income into two parts so that you do not engage in profligacy and wasteful expenditure. You should put 50% of your salary into fixed income and 50% into equity, leading to segregation of your income. Now, withdraw 4% from your bank on a yearly basis. This rule works for 96% of the time in a 30 year period.

4. Stock Allocation Rule – 100 minus your age rule

The allocation of assets is done on the basis of this principle. This rule states that people should own a percentage of stocks which 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 equities.

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

Equity : 70%
Debt : 30%

But if your Age is 60 so (100 – 60 = 40)

Equity : 40%
Debt : 60%

5. Asset Allocation Rule – 10-5-3 Rule

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

10℅ Rate of return – Equity / Mutual Funds
5℅ – Debts ( Fixed Deposits or Other Debt instruments)
3℅ – Savings Account

6. 50-30-20 Rule – about allocation of Income to Expense

This rule can be applied for bifurcating your spendings for different purposes and monitoring so that one doesn’t overspend and control his or her budgets and personal finance.

Dividing your income into three parts will help you in channelising its flow:-

 50℅  of your earnings should be dedicated to your needs (Groceries, rent, emi,etc)
 30℅ of your salary should be allocated for your wants and desires (Entertainment, vacations, etc)
 20℅ of your remunerations should be kept aside for your savings (Equity, MFs, Debt, FD, etc).

This is not a hard and fast rule; you can definitely save more by exercising restraint when it comes to reckless spendings.

7. 3X Emergency Rule

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

8. 3 X Monthly Income

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

9. 40℅ EMI Rule

As suggested by many financial experts, people should never cross the limit of investing 40℅ of their income into EMIs. If a person earns ₹ 50,000 per month, he or she should not have EMIs more than ₹ 20,000. It is a general yardstick rule followed by finance companies in order to sanction loans but individuals can use it to manage their finances.

10. Life Insurance Rule

Life Insurance Rule can also be used to regulate personal finance. To evaluate the minimum sum assured in term life insurance, the best way to calculate is 10 times the annual income, thereby meaning if your current annual pay is ₹10 lakh, you should have a life insurance cover of at least ₹1 crore.

Source : Financial Express