Investing Thumb Rules

The Economic Times - Wealth (Feb 14th Edition) has published a good collection of Thumb Rules for Investing.

• Rule of 72 - Double your Money. Dividing 72 by the compounded interest rate tells you how much time your money will take to double. For e.g. if your investment is earning 9%, then money will double in 72/9 = 8 years.
• Rule of 114 - Triple your Money. Dividing 114 by the compounded interest rate tells you how much time your money will take to triple.
• Rule of 144 - Quadruple your Money. Dividing 144 by compounded interest rate tells you how much time your money will take to quadruple.
• Rule of 70. Dividing 70 by the current rate of inflation tells you how fast the value of investment gets reduced to half its present value. As an example, inflation of 7% will reduce value of investment to half in 10 years (70/7). However, the assumption here is that inflation rate remains constant.
• 100 Minus your age Rule. Subtract your age from 100 to find how much percentage should be invested in equities. So if you are 30 years old, invest 70% (100-30) in equity.
• The 10, 5, 3 Rule. You can expect 10% from Equities, 5% from Bond and 3% from liquid / cash like accounts
• Emergency Fund Rule. Always keep aside 3-6 months worth of expenses in a liquid saving account for emergency purpose
• 4% Withdrawal Rule. Financial Planners typically suggest using 4% as a thumb rule to withdraw during retirement.
• Pay yourself First. Experts suggest that 10% of your income should go in for retirement corpus. The rule ensures that as you earn more, you save more for your retirement.
• Are you wealthy? Thomas Stanley & William Danko gave a thumb rule formula in 'The Millionaire Next Door' a book that studies selfmade American Millionaires. You are wealthy if your Net worth as on today equals (Age *Pre-Tax Income)/10. In the Indian context, the financial experts argue changing the denominator value. Instead of keeping at constant 10, it should be a sliding scale linked to age. Article says experts argue applying a denominator of 25 for a 20 year old and denominator of 20 for a 40 year old

Regards, Rohit

Credit & Reference: The entire post above is based on the article published in The Economic Times - Wealth, Feb 14th edition.