3 Smart Rules for Personal Finance - Common Sense Living Newsletter
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3 Smart Rules for Personal Finance

Jul 29, 2015

3 Smart Rules for Personal Finance 

Editor's Note: When I wrote to you about my efforts to get my personal finances in order - I told you I was having a hard time finding good, solid, advice I could both understand and trust.

Either the information out there was written in boring, incomprehensible jargon or I couldn't even read it without imagining bouncers flying above my head. Or, I couldn't be sure I wasn't being told tall tales and being given dreams of wealth while I was being fleeced.

So I can't believe how happy I am to have made friends with PersonalFN. Not only do I trust them, and understand them, but I also find them easy to talk to and easy to read. That is why I am working with them on multiple personal finance projects, both personal and professional.

You'll see what I mean when you read this super piece on three top personal finance rules we should all keep in our minds...

To your wealth,

Anisa Virji
Managing Editor, Common Sense Living


There's information flying at you from all directions - personal finance websites, emails from your bank, insisted upon by your advisor, some guru in the news... While you're ducking and dodging this information trying to figure out what exactly you should be doing, sometimes it helps to take a step back and do a broad check to see if you've got your basics in order.

This is where general thumb rules can save you time and let you know if broadly you are on the right track.

The thumb rules we will show you here are not general - they are in fact all-encompassing. They will give you exactly the three ideas you should be well-versed with, to ensure your financial safety at all times - no matter who you are and at what stage of your financial life you are in.
So learn these, practice them and lock them away in your minds forever more.

Thumb Rule # 1: Stocks - should you or shouldn't you?

One general guideline about stocks people sometimes follow is that your equity exposure should be (100 - Your Age)%. The balance should be in debt or fixed income instruments.

So, if you are 30, then 70% of your wealth (100 - 30) % should be invested in the stock markets.

But we have grave reservations about this conception.

Here's what we believe...

A 30-year old might have a number of short term financial goals planning for significant life events, such as a wedding, or a first born child, or buying a car and so forth. With 70% of his money in stocks, he would have no capital protection and his funds would be exposed to market volatility. What, then, happens if he suddenly needs to pull out money? It's a recipe for loss.

Age is not always an appropriate gauge of financial planning. We can think of another, better way to plan - and that is calculating your equity exposure not by your age, but by your financial goals.

Thumb rule # 1: 3 years or less left for your goal = No Equity Exposure

This might seem a bit extreme, but consider this. The market is volatile - it's not going to time itself according to your needs, and you can't time your life accordingly either. Are you going to say to your potential partner, ‘Will you marry me, but only when the markets are up?' So if you have goals coming up within the next three years - avoid equity completely!

If you can start planning now for your long-term plans, three years or more, then certainly consider equity investments, and we encourage it with all our hearts. In fact, the further away your goal, the more equity exposure you can have.

For example, if you have 5 years to your goal, consider 60% equity, 40% debt. For a goal that is 10 years away, consider 80% equity, 20% debt. Your age has very little to do with it.

Thumb Rule # 2: The Rule of 69 Stocks

You have probably heard of the rule of 72. It is supposed to help you calculate what rate of return it will take to double your money.

For example, if somebody tells you that by investing in so-and-so product, your money will double in only 8 years, the quick calculation would be:

Rate of Return = 72 / Number of Years to Double Money (8 years) = 9%p.a.

But this isn't entirely accurate.

The reason the number 72 is often used for this calculation is because it is easily divisible by many denominators and is close enough to the real number, which is in fact 69.

But the real number is in fact 69, and that is the number we believe you should stick to, to get a more accurate answer to your double-your-money question.

In the example above, if something is doubling your money in 8 years, then 69 / 8 gives you 8.625% p.a. i.e. lower than 9%.

Consider taxes and inflation eating into your returns, and suddenly this double-your-money-in-8-years product doesn't seem very attractive, does it?

So the new rule to keep in mind, the Rule of 69...

Thumb rule # 2: Rate of Return = 69 / Number of Years to Double Money

Thumb Rule # 3: Save & Invest at least 25% of your salary

A rule that many people follow is to save and invest 10% of their incomes. Let us be completely blunt with you - this is not nearly enough, not even by half.

Remember this: the more you save now, the more your money compounds. And if there's one magical thing about finance, it's the power of compounding. You might have to cut back on discretionary expenditures to save 25% of your salary, but in the end it will be worth it.

So aim for at least 25% of your take home salary being saved and invested. Invest it as according to your financial goals, and as your salary increases, remember to at least proportionately increase your investments.

Thumb rule # 3: Save & Invest at least 25% of your salary

We know these are just general thumb rules, which means they are not specifically tailored to your situation. And of course, we recommend you get out there and get personalized financial advice, there is no substitute for that, and that is why we exist.

But until then, these three rules are meant to guide and inform you, and most importantly, protect you from making huge financial faux pas that end in disaster. Lock these away nice and tight in the backs of your minds knowing that as long as you are following them, you are on the right track.

Image Source: yurchello108 / Shutterstock


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13 Responses to "3 Smart Rules for Personal Finance"


17 Feb, 2016

very good. thanks.

pankaj agrawal

30 Dec, 2015

good article


09 Aug, 2015

sir nice article but it apply only where suficient income is there and save to money,but we need to know first how to earn money?


03 Aug, 2015

The above three rules are simple and easy to follow.they are thumb rules yet different from the but and bolt rule.but writer should have elaborated it.

sadashiv Potadar

02 Aug, 2015

Good to know more about investing. However the inflation rate in India really eats into your wealth and the income tax paid on earnings also drives off the benefits to a negligible percentage over the years. Let the people opt for tax free returns and add to that the Section 80C rebates .The sooner you opt for PPF the better. Thanks for an eye opener.

Darshan Singh

30 Jul, 2015

Well, These rules are fine if you have money...But in India - Firstly, There is NO SOCIAL SECURITY. Secondly, The Interest Rates are NOT IN LINE WITH INFLATION, eroding the savings, always! Thirdly, Pay Tax on Fixed Deposit Interests/MF Dividends/Pension Funds/ Pension etc....everything.So that one is left with more Worries than Money!! Fourthly,The Government wants you to have yearly Tax Free Income of Rs.2.5L, only and make a decent living in a city with your family of average 4 (Four) in Rs.20,000/- per month ... eating Fruits @ Rs.120/- per Kg & Vegetable @ Rs.80/- per Kg (average) with Water/ Electricity/ Telephone/ Medical/ Rent/ School Fee Bills etc...Killing the entire family as early as possible...Wow!!! So, either you indulge in corruption or get ready to die, soon.

Like (2)

paul dmello

30 Jul, 2015

Sir, it is pointless asking some one to plan his finance at the age of 30 or 40 and thereafter. We need to guide our youngsters to start saving in equity mutual funds of good records right from his first salary and let the sip continue, increasing it every year by 10% This will save them all as they will show the way to juniors when they grow old.


30 Jul, 2015

short and sweet


30 Jul, 2015

More accurate is (69/Rate )+0.35

Like (2)

Anjana Mitra

30 Jul, 2015

I appreciate your article. Thnks. Please keep it up. Wish you all the best.


29 Jul, 2015

Dear Sir, Appreciate your efforts and for a valuable guidance on investment. This strategy has to be implemented and kept in mind for ever to who ever coming/entering into stock market/mutual fund investment. Keep it up your articles. Regards. s.ravi chandiran 9894828077

R Tayal

29 Jul, 2015

Of late your articles under commonsense living are exhibiting less & less of commonsense. Today's article is a case in point. This so called rule of 69 debunking the old rule of 72, is a bunkum itself. You can verify easily that for money to double in 6 years or 9 years, in both cases rule of 72 is much more accurate than 69. But that's what happens when someone has to forcibly keep finding something useful to write every day. After some time, it becomes a case of half baked or just gyan vending exercises.

Like (1)


29 Jul, 2015

Its fine.

Like (1)

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