‘Millionaire! One more time I hear this word from your mouth and you will sleep on couch tonight.’ Malvika was really angry this time. Over the past few days, Rohan had become obsessed with becoming very rich. Not an unusual obsession for someone in their early 30s. However, what Rohan could really not figure out is ‘how to be a millionaire’. He was working in a multinational company with a salary package that was appropriate for his age and experience.
‘But I didn’t say anything. How did you know I was thinking about it?’ asked a perplexed Rohan. Malvika amazed at Rohan’s response said, ‘I’m your wife, I even know the facial expression when you don’t like the food I make.’ Rohan tried to laugh but decided it was not appropriate for the moment. ‘Have a look at this Thursday Trivia, it might help you to get an answer to your million dollar question.’ said Malvika with a smile. Rohan couldn’t believe what he had just heard.
‘Thank you so much my dearest!”, Rohan jumped out of his seat and hugged Malvika.
Like a curious child, Rohan browsed through the blog. He found various articles on personal finance and started taking notes. While his primary objective was to learn about certain thumb rules first.
100 minus Age Rule
This rule tells future millionaires how much of their portfolio should be in equities. Thought behind this rule is as the person gets older, his ability to take risk reduces and would not prefer a large swing in portfolio value with fluctuation in equity markets.
Rule : 100 less (Current Age)
Rohan is just 30 years old. He was happy that he could invest 70% of his portfolio in equities. Being young could mean, he would be able to take more risk and realise his dream faster.
“My favourite rule of thumb is (roughly) to hold a bond position equal to your age – 20 percent when you are 20, 70 percent when you’re 70, and so on – or maybe even your age minus 10 percent.” – Jack Bogle
Rule of 72
This particular thumb rule is used to estimate the number of years it would take to double an investment on expected rate of return.
Rule : Number of years to double = 72 divided by rate of return
Rohan quickly realised that current rate of fixed deposit is 6% on fresh investments. Hence, it would take 12 years. (72 / 6)
Rule of 114
This rule is used to estimate the number of years it would take to triple the investment on expected rate of return.
Rule : Number of years to triple = 114 divided by rate of return
Rohan was now thinking. If he invests the same money in debt mutual funds with 8% rate of return. It would take him approximately 14 years to triple his investment and 19 years if he invests in bank fixed deposits at 6% interest.
Rule of 144
This rule is used to estimate the number of years it would take to quadruple the investment on expected rate of return.
Rule : Number of years to quadruple = 144 divided by rate of return
Rohan got excited. He thought if he invests in equities expecting 12% rate of return, his investment would quadruple in 12 years (144 / 12) compared to debt mutual funds taking 18 years (144 / 8) and 24 years in bank fixed deposits.
36% Debt Rule
This rule states the maximum amount of loan / debt to be taken by a person including housing loan, vehicle loan, credit card loan, any other personal loan, etc. should not exceed 36% of his monthly income.
Rule : Equated Monthly Instalments = 36% of Gross monthly income
Rohan with a monthly salary of Rs. 1 lakhs quickly noted down that his total EMIs should not exceed Rs. 36 thousand.
Emergency Fund Rule
This rule states a specific amount to be set aside incase of any emergency such as loss of job, illness, business problems, etc. The amount is usually set aside in liquid assets such as savings account, short term fixed deposit or simply keeping enough cash at home.
Rule : 6 multiplied by Monthly Household Expenses
Upon listening to this rule, Rohan understood that he needs to keep Rs. 3 lakhs as Emergency Fund in his bank all the time as his monthly expenses are Rs. 50 thousand.
10% Saving Rule
This rule talks about minimum monthly savings a person must do as per his monthly income.
Rule : Minimum Monthly Savings = 10% multiplied by Gross Monthly Income
Rs. 10 thousand was not a big deal for Rohan to save. He had a big smile on his face while his mind was working at speed of light.
Malvika sat besides Rohan all the while noticing his changing emotions. It was as if Rohan had found a hidden treasure. However, she was aware that all these are merely rules and she would require assistance of a financial advisor to guide them along.
Dear Readers, we will continue to explore rest of the thumb rules with Rohan in our next Thursday Trivia. Till then, please do write in any particular financial thumb rule that you would like to learn about.
– Jinay Savla
Disclaimer : This particular series of Financial Thumb Rules is only meant for educational purposes. We do not in any ways recommend it, as the case may differ for investors per se.