The best thumb rule

Investing thumbrules

There are rules of thumb for everything. In tennis, always start with a good serve; for good writing, avoid using cliches; even there is a six minute boiling rule for well done eggs. And if that is the fact, then why should investing be an exception.

In terms of investing, there are certain thumb rules that help us ascertain how fast our money grows or how fast it loses its value. Then, there are rules to make our investment process easier. Like how should we do our asset allocation in mutual funds, how much to save for retirement and for emergencies etc.

In this blog, we will talk about the 10 most popular thumb rules in the world of investing.

First, let’s look at the 3 rules to understand how fast your money can grow

Rule of 72: 

We all want our money to double and look for the ways it can be done in the shortest amount of time. Well, calculating the number of years in which your money doubles is very easy with the Rule of 72.

Take the number 72 and divide it with the rate of return of the investment product. The number at which you will arrive is the number of years in which your money will double. For example, let’s suppose you have invested Rs 1 lakh in a product that provides you a rate of return of 6 percent. Now, if you divide the number 72 with 6, you arrive at 12.

That means, your Rs 1 lakh will become Rs 2 lakh in 12 years.

Rule of 114: 

Like the ‘rule of 72’ tells you in how many years your money can be doubled, this rule tells you how many years it will take to triple your money.

The mathematical formula for Rule of 114 is similar to Rule of 72. For this, take the number 114 and divide it with the rate of return of the investment product. The remainder is the number of years when your investment will triple. So, if you invest Rs 1 lakh in a product that gives you an interest rate of 6 percent, then as per the rule of 114, it will become Rs 3 lakh in 19 years.

Rule of 144: 

Two multiplied by 72 is 144. Hence, you can simply understand that ‘rule of 144’ helps you calculate in how many years your money will grow four times if you know the rate of return.

For example, if you invest Rs 1 lakh in a product that gives you 6 percent interest rate, it will become Rs 4 lakh in 24 year as per the rule 144. All you need to do is divide 144 with the interest rate of the product to calculate the number of years in which the money will grow four times.

Now, as much as it is important to understand how fast your money grows, it is equally essential to know how fast the value of your money diminishes.

Let’s look at the rule that helps you determine how fast money loses its worth

Rule of 70:

This is an excellent rule that helps you determine what your current wealth will be valued at 10 or 20 years down the line. Even if you do not spend a single penny from it (neither invest), it’s worth will be much less than what it is today. The reason is inflation.

To calculate this, take the number 70 and divide it by the current inflation rate. The number that you arrive is the number of years your wealth will be worth half of what it is today.

For example, let’s suppose you have Rs 50 lakh and the current inflation rate is 5 percent. So going by the rule of 70, your Rs 50 lakh will be worth Rs 25 lakh in 14 years. For this, we simply divided the number 70 by 5 to calculate the number.

And now that you know how fast your money goes up and down, let’s look at some other rules that help you in the investment process.

Let’s look at the 5 thumb rules you can use while investing

The 10,5,3 rule 

When we invest or even think of investing money, the first thing that we usually look for is the rate of returns that we will get from our investments. The 10,5,3 rule helps you determine the average rate of return on your investment.

Though there are no guaranteed returns for mutual funds, as per this rule, one should expect 10 percent returns from long term equity investment, 5 percent returns from debt instruments. And 3 percent is the average rate of return that one usually gets from savings bank accounts.

The emergency fund rule: 

As the name suggests, the money kept aside for emergency use is called an emergency fund. It is a good practice to keep six months to one year’s expenses as an emergency fund. While calculating your expenses you should include expenses for food, utility bills, rent, EMIs etc. And instead of keeping it idle in savings bank accounts invest in liquid funds. These funds provide a little more returns than savings bank accounts. At the same time, like saving banks accounts, liquid funds are highly liquid, i.e. the money is available in very short notice.

To know more about emergency fund click here

100 minus age rule:

The 100 minus age rule is a great way to determine one’s asset allocation. That is, how much you should allocate in equities and how much in debt.

For this, subtract your age from 100, and the number that you arrive at is the percentage at which you should invest in equities. The rest should be invested in debt.

For example, if you are 25 years old and you want to invest Rs 10,000 every month. Here if you use the 100 minus age rule, the percentage of your equity allocation would be 100 – 25 = 75 percent. Then Rs 7,500 should go to equities and Rs 2,500 in debt. Similarly, if you are 35 years old and want to invest Rs 10,000, then according to the 100 minus age rule the equity allocation would be 100 – 35 = 65 percent. That means, Rs 6,500 should go in equities and Rs 3,500 in debt.

10 percent for retirement rule: 

When we start earning in our early or mid twenties, saving for retirement is the last thing in our mind. But starting to save from your first salary, no matter how little the amount is, you will be able to create a huge corpus for retirement. And ideally it should be 10 percent of your current salary which you should increase by another 10 percent every year.

For example let’s assume that you are 25 year old and earn Rs 30,000 a month. You have decided to invest 10 percent of your salary, i.e. Rs 3000, every month, and increase it by another 10 percent every year. Let’s calculate the retirement corpus you will be able create by investing in an instrument that provides 10 percent returns.