These two Financial Rule To achieve financial freedom The 50/30/20 Rule and the Rule of 72 are two guiding principles that can help you navigate the waves of financial planning in the wide world of personal finance. Though these ideas can sound like code, don’t be alarmed! We’ll explain things simply, with a dash of Indian twang.
These two rules can benefit you to achieve financial freedom as soon as possible. The sooner you start this, the sooner you can plan for retirement.
50/30/20 Rule:
50% for Needs:
The first and most crucial category is your needs, encompassing essentials like housing, groceries, utilities, and transportation. In India, these expenses may also include education and healthcare costs for your family. Aim to allocate no more than 50% of your income to cover these necessities.
Example: If your monthly income is ₹50,000, limit your essential expenses to ₹25,000. This ensures that you’re meeting your basic requirements without overspending.
30% for Wants:
The second category allows for discretionary spending on non-essential items or “wants.” This includes dining out, entertainment, shopping for non-essential items, and other personal indulgences. While it’s important to enjoy life, keeping this category within 30% of your income ensures you’re not jeopardizing your financial future for immediate gratification.
Example: With a monthly income of ₹50,000, you have ₹15,000 to spend on wants. This can cover leisure activities, dining at restaurants, and other non-essential expenses.
20% for Savings:
The final category is dedicated to building your financial foundation. Allocate at least 20% of your income towards savings and investments. In the Indian context, this could include contributions to retirement funds, emergency savings, and long-term investments.
Example: With a monthly income of ₹50,000, earmark ₹10,000 for savings and investments. This disciplined approach ensures you’re building wealth and preparing for the future.
Rule of 72:
With a set yearly rate of return, the Rule of 72 provides a simple and quick method to determine how long it will take an investment to double in value. The calculation is straightforward: the number of years it will take for your money to double is equal to 72 divided by the annual interest rate.
You might wonder why we use the number 72. It’s a convenient approximation that makes mental calculations easier. The number 72 has many factors (1, 2, 3, 4, 6, 8, 9, 12, 18, 24, 36, 72), making it versatile for quick estimates without the need for a calculator.
Let’s break it down with an example:
Example:
Suppose you invest ₹10,000 at an annual interest rate of 8%. According to the Rule of 72:
Years to Double=72/8 = 9
After 9 years, your ₹10,000 investment would grow to ₹20,000. Here’s a simple breakdown:
- Year 1: ₹10,000 + 8% interest = ₹10,800
- Year 2: ₹10,800 + 8% interest = ₹11,664
- …
- Year 9: ₹19,656 + 8% interest = ₹20,000
Practical Tips for Implementation:
Track Your Expenses: Start by understanding where your money is going. Keep a detailed record of your expenditures to identify areas where you can cut back on unnecessary spending.
Emergency Fund: The 50/30/20 rule emphasizes the importance of building an emergency fund. Aim to save at least three to six months’ worth of living expenses to handle unforeseen circumstances without jeopardizing your financial stability.
Invest Wisely:
Utilize the 20% allocated for savings to invest in avenues like mutual funds, fixed deposits, or other investment options that align with your financial goals. Diversifying your investments can help mitigate risks.
Review and Adjust:
Regularly reassess your budget to accommodate changes in income or expenses. Because life is dynamic, your financial plan should also be flexible.
Conclusion:
Understanding the 50/30/20 Rule and the Rule of 72 is like reading ancient scrolls that reveal the keys to creating wealth and maintaining financial stability amidst the colorful mosaic that is India’s financial landscape. Equipped with these fundamentals, you may successfully traverse the varied waters of personal finance, rendering well-informed choices that harmonize with your financial objectives.