How To Invest?
Personal Finance
Many of us don't understand how growth works and why it is important to take care of our personal finance.
The statistics say, three-quarters of Americans facing a retirement crisis. The situation in other nations is similar, if not worse. It becomes very important to secure your future and to do so you have to be aware of how to invest your monthly salary wisely.
Different salaries need different investment strategies. There is no such strategy as a "one size fits all".
Let me ask a question to you - why do you earn? The answer to this question may vary from person to person as everyone has their own priorities, desires, and lifestyles. But if you outlook the overall picture everyone has three big goals—
- Managing household expenses
- Planning for the future
- Emergency funds
But the issue is many of us don't know how to manage our salary wisely. There are thumb guidelines that can use for individuals who are in the middle of their careers and don't yet have a solid financial plan in place.
Below points are some thumb guidelines that you can choose that suit your personality and as per your interest.
50:30:20 Rule—
The 50:30:20 rule says that 50% of your income should be spent on necessities( household expenses), 30% on desires, and the remaining 20% should be used to establish an emergency fund.
It is important to be prepared for the future and plan for retirement but it is also important to secure your family and to do that you can buy life cover or health insurance with your surplus money.
Rule of 72—
The rule of 72 is used to calculate the number of years in which your investment will be double.
To determine the number of years it will take for your investment to double, use the formula below—
| Annual Interest Rate | The Rule of 72 | Actual Number Of Years |
|---|---|---|
| 1% | 72.00 | 69.66 |
| 2% | 36.00 | 35.00 |
| 3% | 24.00 | 23.45 |
| 4% | 18.00 | 17.67 |
| 5% | 14.40 | 14.21 |
| 10% | 7.20 | 7.27 |
| 20% | 3.60 | 3.80 |
| 30% | 2.40 | 2.64 |
| 50% | 1.44 | 1.71 |
| 75% | 0.96 | 1.24 |
| 100% | 0.72 | 1.00 |
So, if you want to double your money in six years then your rate of return on an investment should be 12%.
Rule of 72 : Number of years to double = 72/ interest rate
Rule of 114 : Number of years to triple = 114/ interest rate
Rule of 144 : Number of years to quadruple = 144/ interest rate
Rule of 20:4:10—
Today everyone is looking for a comfortable life and buying a car is everyone's desire. But wait! it is not that easy to buy a car (it's expensive). Buying a car can imbalance your savings and retirement plan as well. Then how it is possible to buy a car along with managing your budget. You can figure it out with a simple 20/4/10 rule of thumb.
- The rule of 20:4:10 uses straightforward math—
- 20 stands For the minimum percentage you should pay as a down payment (the more you pay is good for you).
- 4 means You should not finance a car for more than four years.
- 10 indicates You should not spend more than 10% of your monthly revenue.
Suppose your annual income is $55,450 then your budget should show whether you have $462 or more to put towards your vehicle loan payment.
The rule of 100
In the financial world, this method is used for asset allocation. To determine how much of your portfolio should be allocated to equities, simply subtract your age from 100.
For example, if you are 20 years old, logic suggests that you should invest 80% of your money in stocks and the rest in debt.
- Furthermore, we suggest you to consider three timelines—
- Less than 1 or 2 years (short-term savings)
- Less than a decade (mid-term savings)
- Lifetime (long-term savings)
You may utilize your short-term savings to go on a trip, purchase surprise gifts or pay your taxes.
You may utilize it to make a down payment on a home or car, cover insurance policies, or re-invest as per your interest.
The average retirement age in the US was 65 for men with $76,000 and 63 for women with $23,000 (approximately the same all over the world). Here you can plan your early retirement, emergency funds.
How to make a financial plan
- List your assets and liabilities, lesser the liabilities is good for you.
- Your income is your profit, spend it wisely.
- List your expenses.
- Limit your borrow, expert suggests your overall EMI outgo should not exceed 35% of your take-home pay.
- Start investing as early as possible.
- Diversify your savings on different asset classes.
- Invest in mutual funds.
- List your short-term, mid-term and long-term goals.
- Create an emergency fund.
- Cover life-health insurance for your family.
- Choose your investment carefully.
- Review your investment periodically.
Keep in mind—
At least 20% of your saving should be set side for investment