Top Thumb Rules of Investing

Top Thumb Rules of Investing

Top Thumb Rules of Investing

While some individuals believe that rules restrict someone’s abilities, others believe that rules save them from crumbling down.

Likewise, there are investment standards and rules that some investors follow while others develop their own.

Nevertheless, when it comes to investing, especially if you are a novice, implementing the thumb rules may help you save a lot of mistakes and boost your chances of profiting from the economy.

In this post, you will learn about certain thumb rules that are advantageous for investors:

How much money should be saved?

At the outset of your employment, you should save at minimum 10% of your pre-tax income.

As your earnings improve, so should your savings rate, which should rise from 15% in your starting in the early twenties to 35% by the period you arrive at 40.

Of course, the significant investments that you must make are determined by your life objectives.

These are only the absolute minimal percentages to guarantee you have a strong asset inventory.

Emergency Reserve Fund
Even though you should buy insurance coverage especially while you are young, you should also keep an emergency fund on hand for when the going gets tough.

This will be useful in the scenario of emergencies. Even if you are going through a difficult period, you don’t have to delay essential costs and will be able to meet your EMI and other obligations.

The emergency savings ought to be equivalent to 6 months’ worth of your overall salary, according to the general rule.

This one will take time to create; your principal aim should be to establish a emergency fund equivalent to six months’ worth of income as soon as possible and then work your way up to the appropriate corpus.

Insurance planning principle:
Following the emergency savings, insurance planning is an essential aspect of investing.

If you’re asking how it fits within the principles of investing, you should know that if there’s a medical emergency, catastrophic event, or something of the kind, your investments can go to suffering if you depend exclusively on them.

It is critical to obtain Personal accident insurance plans, healthcare plans, and other insurance policies to protect your health, possessions, and property, particularly in the event of an emergency.

Insurance consumption in India is quite low, and it is still marketed rather than purchased. Many insurance policies are also ‘mis’ marketed here.

The Withdrawal Rule of 4%: (rework as per 6%)
You must be quite specific about the withdrawals rule if you want to plan for a monetarily stable tomorrow.

This withdrawal rule of investment is extremely crucial if you are saving for retirement. You can use the Retirement Calculator in India. for the amount you need for the retirement according to your needs.

It states that you shall not remove more than 4% of your retirement corpus in a single year.

For example, suppose you have saved Rs. 2 crores for your retired life.
According to the 4% standard, you must only draw Rs. 8 lakhs a month, or Rs. 66666.

There is also the issue of inflation, which must be addressed. Assume that the inflation rate is 6%. nIn order to account for inflation, you might increase your withdrawal by 6% annually.

The 50-30-20 rule
The 50-30-20 rule governs the distribution of earnings to expenses.

In this case, split the earnings into 3 categories: necessities, desires, and savings, with 50 percent going to necessities such as food, rental, and EMI, 30 percent going to wants such as leisure and excursions, and 20 percent going to savings such as equities, mutual funds through Systematic Investment plan(SIP), debt, and Deposits.

The Rule of 70 – How quickly is your corpus eroding?
Inflation steadily corrodes your buying power. It is extremely difficult to predict a person’s buying power after any ‘n’ amount of years.

This is a very useful guideline for predicting your future purchasing power.
Divide 70 by the current inflation rate to see how quickly the worth of your asset will be decreased to 50% of its current valuation.

This is specifically used for retirement savings. For instance, a 6% inflation rate will cut your corpus in half after 10 (70/6) years.

So, if you believe that a one-crore retirement is plenty now, consider that it will be worth half as much in ten years.

40% EMI rule
Never put more than 40% of your salary on EMIs. If you paid Rs 50,000 per month, your EMIs should not be more than Rs 20,000.

This guideline is commonly utilised by financial institutions to provide loans.
However, it may also be used to manage one’s money. If you are struggling with EMI’S, you should consult with an advisor for Financial portfolio management.

While monetary requirements fluctuate from individual to individual, there are certain fundamental “rules” that pertain to a wide range of scenarios.

These tried-and-true thumb principles can help you enhance your economic state.

These principles may need to be tweaked throughout implementation, but they can be beneficial to your fiscal viability.

CA Mukesh Gupta
CA Mukesh Gupta
Mukesh Gupta is the founder and director of Wealthcare. He is Fellow chartered accountant, Certified Financial Planner and Certified Public Financial advisor. He is in financial services industry since 1994. He conducts free money management sessions for corporates and associations on topics related to Personal finance. His previous engagement was with Birla Sunlife group. He regularly writes on topics related to Personal finance and occasionally appear on electronic media.

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