‘Control your excitement. I know how big a spendthrift you are. Just by learning some basics about equity, debt, calculations on compound interest, savings, etc. you think, you will become a millionaire. Money is easy to make and difficult to keep. What about our dreams of owning that house in Goa, a brand new Mercedes and spending our retirement life travelling around the world. Have you even figured that out?’ That was a long lecture from Malvika.

‘Please keep some patience. I am reading that as well. Everyone cannot be as fast a learner like you.’ Rohan did sound a little irritated. Although Malvika had arranged a meeting with professional financial advisor in the evening, Rohan felt he needed to get educated first. For him, it was like a little child in a candy shop. Malvika continued to prepare lunch after instructing Rohan not to disturb her as she had better things to do during the day.

After being overwhelmed by previous Thursday Trivia, Rohan continued his quest for financial education.

Retirement Corpus Rule

This rule states the quantum of money required by an individual to lead a peaceful and financially stress free post retirement life.

Rule : 20 multiplied by Gross Annual Income

With a gross monthly annual of 12 lakhs, Rohan calculated he would need a corpus of Rs. 2 crores and 40 lakhs to live a comfortable and peaceful retirement life. However, with so many expenses coming up, it would be easier said then done for him.

4% Safe Withdrawal Rule

This rule was published originally in 1994 by William Bengen where he proposed a safe withdrawal rate from retirement corpus.

Rule :  (Year 1) Withdrawal Amount = 4% multiplied by retirement corpus

(Onwards)  Withdrawal Amount = Amount calculated in previous year plus Inflation

Rohan was quick on his calculations. 1st year withdrawal amount for him would be Rs. 9 lakhs and 60 thousand. He expected inflation to be around 6% on average. Hence, his withdrawal amount in second year of retirement would be Rs. 10,17,600/-, Year 3 would be Rs. 10,78,656/- and so on.

After being satisfied with thumb rules on his retirement corpus, Rohan decided to learn about his short term goals of buying a house and a car.

 House Affordability Rule

This rule helps an individual to decide the maximum amount to be spent while purchasing a house. There are variations to this rule where the suggested range varies between 2x and 3x. Hence, for simplicity of calculations we will use 2.5x as a range.

Rule : Maximum value of house = 2.5 multiplied by Annual Income

With annual income of Rs. 12 lakhs, Rohan could buy a house with maximum worth Rs. 30 lakhs. This made him determined that he needs to work a lot harder to afford a better house.

Housing EMI Rule

It’s such a fantasy to own a large house in a posh locality. Tax rebates on payments of housing loan provide a further icing to the cake. This rule inculcates a reality check of the maximum amount an individual can budget for housing loan monthly EMI payments.

Rule : Maximum Monthly Home loan EMI =  28% multiplied by Gross Monthly Income

Rs. 28,000/- was the maximum Rohan could afford in his EMIs every month. He noted the same on a piece of paper.

Car Affordability Rule

This rule talks about maximum price an individual can budget for while purchasing of a new car.

Rule : Car Affordability = 50% multiplied by Gross Annual Income

Rs. 6 lakhs worth of car Rohan could afford as of today. To buy that Mercedes he would need to become Vice President of his company. Goals suddenly now looked clear to him.

Car Loan Rule – 20 / 4 / 10

This rule talks about prudent practices to be applied while purchasing a car incase an individual takes a loan.

Rule :

Downpayment – 20%

Tenure of Car Loan – 4 years

Total Expenses on Car (Yearly) – 10% multiplied by Gross Annual Income

Rohan was calculating his total expenses on current car which included current EMI, fuel expenses, insurance, parking rentals and repairs. As he calculated, he realised they were more than Rs. 1,20,000/- a year and figured out he could potentially save here. A smile now shaped up on his face.

48 Hour Rule

Impulse purchases gives a dopamine hit to our brain. It makes an individual feel good about owning them in the short term. In the long term, an individual usually forgets owning them unless they find it during their Diwali house cleaning.

Rule : Wait for 48 hours before purchasing something. If an urge still remains then go ahead with it.

Rohan looked around the house and was horrified by so many impulsive purchases done in the last year which were of no use now. He felt devastated and happy at the same time. Devastated because he had wasted so much money for things that don’t matter now and happy as he knew he wouldn’t repeat the same mistake next time.

But he did commit one mistake!

Rohan went to share this rule with Malvika. I’m sure many of you can guess the impact of this sharing.

‘What nonsense! It’s you who want so many things. Look around the house, 80% of useless stuff has been bought by you. In the blind race of showing your ‘about to be millionaire status’ this whole house has become a godown a useless things.’ Malvika said it with a rigour.

Watching Rohan in absolute shock, Malvika continued, ‘Don’t worry my dear, we have called a personal finance expert from Circle Wealth Advisors to sort all your worries out. Just wait a little and all your questions will find a house of solutions.’

Dear Readers, as Rohan and Malvika will be asking their questions. We invite you as well to share any questions you have in the comment section below or you can write them to us personally. We will surely include them and look forward to get your financial thumb rules organised.

– 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.