How do we manage our finance?
It’s money everything in life? Definitely not. However, just as health, education, relationships, knowledge, and hard work are important to us, money too is a vital part of our lives. All said and done, we are not sure of the quantum of money required for a comfortable and peaceful life. How much money should be saved from our earnings, and how much can be spent? These are not million-dollar questions. If the following tips are kept in mind, we will be able to manage our money properly.
50-30-20 RULE:
With this simple rule, we can manage our finances effectively. Fifty per cent of our income might be required for monthly needs such as house rent, provisions, milk, water, electricity, electricity, and payment of EMIs (Equated Monthly Installments) on various loans. We might also require another 30 per cent of our income for entertainment — expenses like cable or satellite TV subscriptions, movie outgoings, restaurants, or travel. The remaining 20 per cent must be compulsorily saved in secure financial instruments. This is the bare minimum we should save. Of course, we should aim to save more than this. The more we save, the more financial security we build for the future. Importantly, this additional saving should not come at the cost of necessities.
If our monthly income is, say Rs 50,ooo, then 50 per cent — Rs 25,000 — is allocated for essential monthly expenses. Thirty percent — Rs 15,000 — is for entertainment, and the remaining 20 percent — Rs 10,000 — is the amount we must save.
Additionally, we can use part of the interest earned from these savings for personal needs or to help the needy. The percentage of savings may vary from person to person or family to family, but savings should never fall below 20 percent of one’s income.
Fixed Deposits (FDs) in banks, post offices, reputed companies, mutual funds, shares, gold, etc, are good avenues. However, we must not fall for the lure of exorbitantly high interest rates or become victims of cyber fraudsters.
RULE OF 72:
Many of us want to know how many years it will take for our savings to double. This can be calculated easily using the Rule of 72 by the annual interest rate, we get the number of years it will take for our money to double. For instance, if we deposit money at an 8 percent interest rate, dividing 72 by 8 gives 9. So, if we deposit Rs 1,00,000, it will become Rs 2,00,000 in 9 years at 8 percent, it will double in 8 years, and at 6 percent, in 12 years.
RULE OF 114:
To know when our money will triple, we apply the Rule of 114. Divide by 114 by the interest rate. For example, at 8 percent interest, 114/8 = 14.25 years ( 14 years and Rs 3 months). So, Rs 1,00,000 will become Rs 3,00,000 in 14 years and 3 months. At 6 percent, it would triple in 19 years. This helps us plan better for long-term goals.
RULE OF 144:
To know when our savings will quadruple, we use the Rule of 144. Divide 144 by the interest rate. At 12 percent, 144/12 = 12 years. That means Rs 1,00,000 in 12 years. At 6 percent, it would take 24 years. Understanding these rules can help us make wise investment decisions.
RULE OF 70:
Inflation refers to the rise in prices of goods and services. If an item costs Rs 100 today and Rs 105 next year, that’s 5 percent inflation. If we earn 5 percent interest on our savings. it cancels out the inflation, meaning we gain nothing in real value. If our money earns no interest, inflation erodes its value. Dividing 70 by the inflation rate gives the number of years in which our money’s value halves. At 5 percent inflation, 70/5 = 14 years. So Rs 1,00,000 not invested will be worth only Rs 50,000 in 14 years. Hence, it’s crucial to invest wisely to beat inflation and preserve our money’s sake.
EMERGENCY FUND:
Medical emergencies or unexpected expenses may arise. Job loss due to recession or company downsizing is also possible. To handle such situations, it is advisable to maintain an emergency fund equal to 3 to 6 months of income.
40% EMI RULE:
From our monthly income, we spend on essentials and may also repay loans via EMIs. We must ensure that EMIs do not exceed 40 percent of our monthly income. If the income is Rs 50,000, EMI should not exceed Rs 20,000. Following this rule helps manage finances efficiently. In fact many financial institutions use this guideline when approving loans.
LIFE INSURANCE:
In the unfortunate event of the death of the family’s sole bread earner, depends face emotional and financial hardships. That’s why life insurance is important. But how much coverage is enough? A good rule of thumb is to have insurance equal to at. If the monthly income is Rs 50,000, the annual income is Rs 6,00,000, so the sum assured should be at least Rs 60,00,000. One may apt for a higher cover, but premiums should remain affordable.
Just as we care for our health, family, and profession, it is equally wise to maintain discipline in our financial matters.
