This tells you in how much time your money will double. Divide 72 by the interest rate at which you are compounding your money, and you will arrive at the number of years it will take to double in value
If the interest rate is 9% then your money will double in 8 YRS (72/9=8)
Rule of 114 (triple)
Use this to estimate how long it will take to triple your money. It works the same way as the rule of 72. Divide 114 by interest rate to know in how many years 10,000 will become 30,000
Rule of 144 (quadruple)
Similarly, this tells you in how much time your investment will quadruple in value. For instance, if interest rate is 12%, 10,000 becomes 40,000 in 12 years
These rules provide only a rough idea. The actual amount after compounding may vary
HOW FAST WILL YOUR CORPUS ERODE
This is a useful rule for predicting your future buying power. Divide 70 by current infl ation rate to know how fast the value of your investment will get reduced to half its present value. This is especially useful for retirement planning, as it affects the way you set up your monthly withdrawals. However, do remember that infl ation rate varies from time to time.
Inflation rate of 7% will reduce the value of your money to half in 10 years
Rule of 70
This is a useful rule for predicting your future buying power. Divide 70 by current inflation rate to know how fast the value of your investment will get reduced to half its present value. This is especially useful for retirement planning, as it affects the way you set up your monthly withdrawals. However, do remember that infl ation rate varies from time to time
Inflation rate of 7% will reduce the value of your money to half in 10 years. (70 / 7= 10 years)
DO YOU CONSIDER YOURSELF WEALTHY?
A rule-of-thumb formula used by Thomas J Stanley & William D Danko in ‘The Millionaire Next Door’, a book that studies self-made American millionaires, can help determine if you are one
(Age x pre-tax income) / 10 = net worth
The logic behind the formula is that the older you are and the more money you make, the more net worth you should have. Dividing by 10 is a rule-of-thumb that fi ts American conditions. So if you are a 35-year-old living in the US with an annual income of $6,00,000 a year, your net worth should be $2.1 million [(35 X 6,00,000)/10 = 21,00,000] for you to be considered wealthy. If you are 20 years old and you make $3,00,000 a year, you would be wealthy if your net worth was greater than $6,00,000
Indian context
Indian financial experts argue that a divisor that’s closer to 20 would be more realistic in the Indian economy. According to them you should use a sliding scale linked to age. At age 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
THE OTHER RULES
The 10, 5, 3 rule
This is a neat little rule that states that you can expect returns of 10% from equities, 5% from bonds and 3% on liquid cash and cashlike accounts
The emergency fund rule
Put away at least 3-6 months’ worth of expenses in a liquid savings account to ensure it is available at short notice
100 minus your age rule
This rule is used for asset allocation. Subtract your age from 100 to fi nd how much of your portfolio should be allocated to equities
Age 30
Equity : 70%
Debt : 30%
Age 60
Equity : 40%
Debt : 60%
Pay yourself first rule
Right from your first salary, put away a little for your retirement. Experts say 10% of your income should go into this. It is important to increase the amount as your income rises over the years
If every month you invest Rs 5,000 in a plan that grows 8.5% annually and increase your investment by 10% every year, after 30 years you will have Rs 2.5 crore
4% withdrawal rule
How much should you withdraw after retirement? Use the 4% rule to ensure that your corpus outlasts you. Here’s the calculation for a post-retirement monthly income of Rs 33,000 (Rs 4 lakh a year, or 4% of the corpus) which increases 7% every year to account for inflation
If every month you withdraw Rs 33,000 you need a corpus of Rs 1 crore to sustain monthly withdrawals for the next 27 years if the corpus earns 7% and inflation is at 7%
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