Introduction
Welcome! This is about Personal Finance. I will walk you through Simple and practical 10 rules about personal finance. These rules will not only help you in building wealth but also simplify everyday money calculations—even if you are not good at mathematics. By applying these principles, you will be able to estimate returns quickly, make smarter financial decisions, and surprise your friends with how fast you can calculate and plan. After this session, personal finance will feel much easier for you.
Rule 1: The Rule of 72
One common question people have while investing in fixed-income schemes such as FDs, money-back plans, or any instrument offering 7–10% interest is:
“How long will it take for my money to double?”
Instead of depending on agents or doing long calculations, you can use the Rule of 72. Simply divide 72 by the rate of interest.
*Example:
If your FD offers 7% interest, divide 72 by 7. The result is roughly 10 years, meaning your money will double in about 10 years.
This rule works best for moderate interest rates (4% to 15%). If someone promises much higher fixed-income returns, it’s a red flag. Similarly, in India, fixed returns below 3% are rare, so this rule is particularly relevant here.
*Another Example:
If an instrument offers 10% interest, divide 72 by 10 = 7 years. So, your money will double in around 7 years. You can keep applying this repeatedly to estimate how your wealth will grow in 14, 21, or 28 years.
This quick method helps in smart decision-making and is extremely useful in day-to-day financial planning.
Rule 2: The 100 – Age Rule
A frequent question people ask is:
“How much should I invest in equity, gold, debt, real estate, or mutual funds?”
The 100 – Age Rule provides a simple guideline.
- Subtract your age from 100.
- The result is the percentage of your portfolio that should be invested in equity.
- The remaining portion should go into other asset classes such as debt, real estate, or gold.
Example
- If you are 30 years old → 100 – 30 = 70.
This means 70% of your investments should be in equity and 30% in other asset classes. - If you are 40 years old → 100 – 40 = 60.
So, 60% equity and 40% other assets.
Note: This is a thumb rule. It assumes you don’t have heavy liabilities or loans. Everyone’s financial situation is unique, so this should be taken as a general guideline—not as personalized financial advice.
Rule 3: The 50-30-20 Rule
This rule helps you answer an important question:
“How should I divide my monthly income between expenses, lifestyle, and investments?”
Divide your monthly take-home income into three parts:
- 50% Needs → Essentials like groceries, rent, electricity, fuel, education, internet, and basic living costs.
- 30% Wants → Lifestyle expenses such as dining out, vacations, shopping, new gadgets, or entertainment.
- 20% Investments & Savings → At least 20% of your income should go into savings and investments.
Example:
If your monthly income is ₹50,000:
- ₹25,000 (50%) → Needs
- ₹15,000 (30%) → Wants
- ₹10,000 (20%) → Investments
This rule ensures a healthy balance between living well today and preparing for tomorrow.
Rule 4: The 6x Emergency Fund Rule
Another crucial question people ask is:
“How much money should I keep aside for emergencies?”
The 6x Emergency Rule provides clarity:
Keep at least six times your monthly expenses in a liquid savings account.
Example:
If your monthly expenses are ₹25,000, you should keep ₹1.5 lakh in your savings account.
Pro Tip:
Instead of keeping money idle at 2–3% interest, ask your bank about auto-sweep facilities that can give you 6–7% returns while still keeping your money liquid and accessible.
This ensures you are financially prepared for emergencies like medical needs, job loss, or urgent repairs.
Rule 5: The 20x Life Insurance Rule
One of the most common financial questions is:
“How much life insurance should I take?”
The 20x Rule makes this simple:
Take life insurance worth 20 times your annual income.
Example:
- If your annual income is ₹5,00,000 → You should take a ₹1 crore term insurance.
- If your annual income is ₹10,00,000 → You should take a ₹2 crore term insurance.
Important:
Here, “life insurance” refers to a pure term plan only, not endowment or money-back policies. A term plan is the most cost-effective and practical form of protection.
Rule 6: The 40% EMI Rule
Another big question is:
“How much loan is safe to take?”
The answer lies in the 40% EMI Rule.
Your total EMIs (including all loans—home loan, car loan, personal loan, etc.) should never exceed 40% of your monthly income.
Example:
If your monthly income is ₹50,000 → Your EMIs should not be more than ₹20,000.
This ensures you don’t become overburdened with debt and still have enough income left for savings and essential expenses.
Practical Tip:
Use EMI calculators to compare different tenures (5 years, 10 years, 20 years) and see how much EMI you will pay. This helps you choose the right loan amount and tenure without straining your finances.
Rule 7: The 25x Retirement Rule
One of the biggest financial goals in life is retirement planning. The question is:
“When will I be financially ready to retire?”
The 25x Rule provides a benchmark:
You are financially ready to retire when you have saved at least 25 times your annual expenses.
Example:
If your annual expenses are ₹10,00,000 → You need a corpus of ₹2.5 crore.
At an expected return of around 4% per year, this amount can generate ₹10,00,000 annually, covering your expenses.
Important Consideration:
- If you retire early (say at 40), you may need a higher multiple (30x–40x) because you will live longer on passive income and inflation will impact you more.
- If you retire at 60, then 25x is usually sufficient since your retirement horizon will be shorter.
This rule gives you a clear target and ensures you don’t underestimate how much you need for a financially stress-free retirement.
Rule 8: The First-Week Investing Rule
Most people follow the habit of spending first and investing whatever is left at the end of the month. The problem is, often nothing meaningful is left to invest.
The First-Week Investing Rule changes this approach:
Invest first, spend later.
Example:
If your salary is credited on the 5th of every month, make sure you invest by the 6th or 7th. After that, manage your expenses with the remaining balance.
This ensures consistency in building wealth and prevents you from overspending before investing.
Rule 9: The 3×3×3 Investment Plan
This rule provides a step-by-step approach to build a solid investment strategy:
Step 1: Three Essential Priorities
- Build an emergency fund.
- Start loan repayment if you have debts.
- Plan for retirement (e.g., National Pension Scheme).
Step 2: Three Protective Investments
- Repay or prepay existing loans.
- Invest in retirement funds.
- Add sovereign gold bonds to protect against market volatility and geopolitical risks.
Step 3: Three Growth-Oriented Investments
Once essentials and protections are in place, you can expand into:
- Stocks
- Mutual Funds
- Real Estate
This structured approach helps you cover safety, protection, and growth in a balanced way.
Rule 10: Summary – Use Rules as Guidelines, Not Absolute Advice
The 10 rules we discussed—such as the Rule of 72, 100 – Age Rule, 50-30-20 Rule, Emergency Fund Rule, Life Insurance Rule, EMI Rule, Retirement Rule, First-Week Investing, and the 3×3×3 Plan—are time-tested thumb rules.
They are meant to make you financially smarter and help you in quick decision-making. However:
- They are not personalized financial advice.
- Every individual’s situation is unique, so you should adapt these rules according to your personal needs.
- For major financial decisions, consulting a certified financial advisor is always recommended.
Think of these rules like a framework—they guide you in the right direction, but your specific journey depends on your personal circumstances.
Disclaimer
The information provided in this document is for educational and informational purposes only. The rules and examples discussed are general thumb rules of personal finance and should not be considered as personalized financial advice.
Every individual’s financial situation is unique, and results may vary depending on income, expenses, liabilities, and long-term goals. Before making any major investment, insurance, or loan-related decisions, it is strongly recommended to consult a certified financial advisor.
The author/creator does not take responsibility for any financial loss or risk arising from the direct application of these rules without professional guidance.
