Number-based Rules For Investing
A few rules about investing could help us figure out how quickly our money grows or loses value. Then, some rules help us decide what to do with our money. For instance, how should we divide up the money in our mutual funds? How much should we save for retirement and emergencies? We've made a list of general tips to keep in mind when making decisions about money or investing. Are you looking for the best trading platforms? Then your search ends here. At Zebu, a share broker company we offer our users the right online trading platform and the best trading accounts. 7 RULES OF INVESTING To quickly understand how much money is worth, you need to know the first three thumb rules. RULE OF 72 Everyone wants their money to double in value and is looking for ways to make that happen as quickly as possible. The rule of 72 gives you an estimate of how many years it will take for your money to double. If you divide 72 by the expected rate of return, you may get a very accurate estimate of how long it will take for your money to double using this method. Let's look at an example to see how this rule works. Let's say you put Rs 1 lakh into something that gives you a 6% return. If you take 72 and divide it by 6, you get 12. That means that in 12 years, your Rs. 1 lakh will be worth Rs. 2,00,000 It's important to remember that this rule only applies to assets that pay compound interest. You can also use the Rule of 72 to figure out how much interest you'll need in a certain amount of time to double your money. For example, if you want your money to double in 5 years, you can find the interest rate by dividing 72 by the amount of time it takes to double. I.e., 72/5= 14.4%p.a. So, for you to get twice as much, you should get 14.4% p.a. RULE OF 114 Using the same reasoning and math formula, the investing rules of 114 can give you a pretty good idea of how many years it will take for your investment to triple. Rule 114 says that if you invest 1 lakh at 6% p.a. for 19 years, it will grow to 3 lakhs. Similarly, if you want your money to triple over the next five years divide 114 by 5, which gives you a rate of interest of 22.8% per year for your money to triple in 5 years. RULE OF 144 Rule 144 is the next rule of thumb to keep in mind when investing in a mutual fund. Rule 72 times 2 is 144. The "rule of 144" tells you how much time it will take to quadruple your investment. Rule 144 says that if you put Rs 1 lakh into a product with a 6% interest rate, it will be worth Rs 4 lakh 24 years later. So, to find out how many years it will take for the money to grow four times, just divide 144 by the interest rate of the product. 100 MINUS AGE RULE The 100-minus-age rule is a great way to figure out how to spend your money. That is, how much of your money should go into equity funds and how much should go toward paying off debt. This investment rule says that you should take your age away from 100. The number you get is the right amount of equity exposure for you. The rest of the money can be used to buy debt. Say, for example, you are 25 years old and want to invest Rs 10,000 each month. If you follow the 100 minus age rules for investing, 75 percent of your money will be in stocks (100 – 25). Then you should put Rs 7,500 into stocks and Rs 2,500 into debt. Using the same rule, if you are 35 years old and want to invest Rs 10,000, you should put 100 – 35 = 65% of your money in stocks. So, you should put Rs 6,500 into stocks and Rs 3,500 into debt. RULE FOR A MINIMUM INVESTMENT OF 10% This rule of thumb says that investors should start by putting away at least 10% of their current salary and then increase that amount by 10% each year as their salary increases. To make the most of the power of compounding, you should start investing as soon as possible. Investing early will help you make the most out of it. EMERGENCY FUND RULE Like the rule about investing at least 10% of your income, you must put some of your salary into the emergency fund. You need to have money saved up because you never know what life will throw at you. So, you should save money for emergencies before you start investing. According to this rule, you should save enough money to cover your monthly costs for at least three to six months. In case of an emergency, you need to be able to get to your emergency fund, and it's best to keep it liquid so you don't run out of money. RULE OF 4% WITHDRAWAL Stick to the 4% rule if you want your retirement fund to last long. If you follow this rule as a retiree, you will have a steady income. But at the same time, you have enough money in the bank to make enough money. For example, if you have a retirement fund of Rs. 1 crore, you should take Rs. 4 lakh every year, or Rs. 33,000 every month, to keep up with inflation. SUMMING UP The rules of thumb listed above are general rules and guidelines that every investor should follow. A good investor is careful, so before you start, you should do your research and talk to someone who knows about investing. That's why it's important to stress that these rules shouldn't be followed without question. Keep in mind that a good investment portfolio helps you reach your financial goals while taking your risk tolerance and time horizon into account. At Zebu, a share broker company we offer our users the right online trading platform and the best trading accounts.