10 Thumb Rules of Investing – How fast you can grow money or erode money?
You invest your hard-earned money with the hope to multiply investments at a very fast pace. But understanding the dynamics of the stock market, real- estate sector or commodity market is not at all an easy task. There are experts and financial advisors who advise and guide to make intelligent investment choices. Along with it, there are a few thumb rules too that are evergreen. If they are combined with expert advice, it would be like a cherry on the cake. In this article we would provide 10 thumb rules of investing, which every investor should know which can help you to grow your money and avoid any erosion of investment.
Importance of knowing thumb rules of investing
Living today and planning for the future is a difficult task in today’s life. We need to allocate our earnings for current needs as well as investing for the future. There are certain guidelines or “blueprint” which one should always keep in mind while planning his finances to have a better chance of successfully managing money and planning a stable financial future. But, do remember that these rules might not fit all the situations.
10 thumb rules of Investing – How fast you can grow money or erode money?
These are 10 thumb rules related to the rate of increasing or eroding your investment, scale of wealth, allocation of investment, or emergency and retirement fund, etc. Let’s discuss them in detail. One should note that these are just thumb rules and these may not be 100% accurate.
3 Thumb rules to know how fast you can grow your money
1) Rule of 72 (to double the investment)
This Thumb rule 72 tells you in how much time it would take to double your money. Divide 72 by the interest rate at which you are compounding your money and you will come to know the number of years it will take to double in value. Like if the interest rate is 9%, then your money double in 8 years (72/9).
You can also use this thumb rule to check which investment option you can invest to achieve your financial goal. E.g. if you want to double your money in 5 years, you can simply use 72/5=14.4. Means if you can invest in investment options that generates 14.4% annualized returns, you can double your money in 5 years.
Here are some examples of Rule of 72 for Rs 1 Lakh investment.
i) Investing in bank FD @ 7.5% interest rate = 72/7.5 = 9.6. Hence it would take approximately 9.6 years to double your money to Rs 2 Lakhs.
ii) Investing in Mutual Fund with approx. 15% annualized returns (long run) = 72/15 = 4.8. Hence it would take approximately 4.8 years to double your money to Rs 2 Lakhs.
iii) Investing in blue chip stock and expecting 20% annualized returns = 114/20 = 3.6. Hence it would take approximately 3.6 years to double your money to Rs 3 Lakhs
2) Rule of 114 (to triple the investment)
This rule works the same way as above. It tells you how long it would take to triple the money. Divide 114 by the rate of interest you are receiving and it will give the number of years your money will be tripled. Here are some examples of Rs 1 Lakh investment.
i) Investing in bank FD @ 7.5% interest rate = 114/7.5=15.2. Hence it would take approximately 15 years to triple your money to Rs 3 Lakhs.
ii) Investing in Mutual Fund with approx. 15% annualized returns (long run) = 114/15 = 7.6. Hence it would take approximately 7.6 years to triple your money to Rs 3 Lakhs.
iii) Investing in blue chip stock and expecting 20% annualized returns = 114/20 = 5.7. Hence it would take approximately 5.7 years to triple your money to Rs 3 Lakhs.
3) Rule of 144 (to quadruple the investment)
This rule tells you in how much time your money will be quadrupled in value. Divide 144 with the rate of interest and you will arrive at the number of years your investment would be four times the original value.
Please note that these rules provide only a rough idea. The actual value of the investment may vary slightly after compounding.
Other thumb rules of investing
4) Rule of 70 – How fast your corpus is eroded?
Inflation erodes your purchasing power slowly and gradually. It is very difficult for a person to estimate what will his purchasing power after any ‘n’ number of years. This is a very helpful rule to know your future buying power. Divide 70 by the current inflation rate to know how fast the value of your investment will get reduced to half its present value. This is specially used for planning your retirement corpus. For example, an inflation rate of 7% will reduce your corpus to half in 10 (70/7) years. So if you are thinking that 1 Crore retirement is sufficient now, this would become half of the value in 10 years. However, keep in mind that the inflation rate changes from time to time.
5) Net worth thumb rule – How can you consider yourself wealthy?
Every layman is confused about how much wealth he / she should have or he / she should accumulate to consider himself wealthy at a certain given age. The rule-of-thumb says that the older you are, the more money you can make, so more worth you should have. There is a formula- (age*pre-tax income)/10= net worth. This is a little tricky formula, might take some time to understand.
The financial experts say that a divisor that is closer to 20 is more realistic in the context of the Indian economy. According to them, you should use a sliding age linked to age. At the age of 40, someone earning 7.5 lakh a year should have a net worth of 15 lakh. For a 20-year old, the divisor should be 25. Hence, a 20-year old earning 3 lakh a year should have a net worth of 2.4 lakh.
6) The 10-5-3 Rule – Simple way to know the expected earnings from investments
People invest in different forms of investments taking into consideration various factors like time horizon, risk aptitude, market conditions, etc. This is the simplest rule that suggests the expected earnings from investments. It says that one can expect 10% returns from equities, 5% from bonds and 3% from liquid cash and cash-like accounts. Some argue these are on the lower side.
7) Thumb rule for the emergency fund
This is again a common question in mind that how much funds should be spared for emergency situations and not be invested anywhere. The rule says that put away a minimum of 3 to 6 months’ worth of expenses in a liquid savings account to ensure that you are never in a cash crunch. This way you are creating and managing emergency fund well.
8) Thumb rule for asset allocation in equity
This rule relates to how much of risk one much take while deciding the asset allocation. The rule says that subtract your age from 100 to find how much of your portfolio should be allocated to equities. Like, at the age of 30, one can invest 70% (100-30) in equity and the remaining 30% in debt.
9) Thumb rule – Pay yourself first
One should start saving for his retirement straight from his first salary. The experts say that 10% of your income should be allocated for your retirement at the initial age and as the income and age increase, you should increase the amount. For instance, every month if you invest Rs. 5000 in a plan that grows 8.5% annually and increases your investment by 10% every year, after 30 years, you will have Rs. 2.5 crores.
10) Thumb rule – 4% withdrawal at retirement
How to determine the withdrawal amount after retirement to ensure that your corpus outlasts you? Use the 4% rule. For a corpus of Rs. 1 crore, one can withdraw Rs. 4 lakh (4% of Rs. 1 crore) a year, which comes to a monthly income of Rs. 33,000. The withdrawals can be made for the next 27 years. Here we have assumed that the corpus earns 7% and inflation is at 7%.
These thumbrules would give approximate and might not be 100% accurate. However, these are simple investment thumb-rules which you can follow without any calculators.
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10 thumb rules of Investing – How fast you can grow money or erode money
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