Knowledge Center

80/20 budgeting method

This basic thumb rule is to divide your post-tax income into three spending categories – 50% for needs, 30% for wants, and 20% for savings.

The "Rule of 72" is a simple method to estimate how long it takes for an investment to double in value based on its annual rate of return. To use it, divide 72 by the annual rate of return. For instance:

• At 1%, it takes approximately 72 years for money to double (72 / 1 = 72).
• At 3%, it takes around 24 years for money to double (72 / 3 = 24).
• At 6%, it takes about 12 years for money to double (72 / 6 = 12).
• At 9%, it takes roughly 8 years for money to double (72 / 9 = 8).
• At 12%, it takes approximately 6 years for money to double (72 / 12 = 6).

This rule provides a quick way to assess the growth potential of investments over time.

Certain loans, such as home loans and educational loans, are generally considered beneficial. However, debts like credit card balances can significantly burden your financial situation. As a guideline, your monthly EMI (Equated Monthly Installment) should ideally not exceed 35-40% of your income. Going beyond this threshold could strain your finances. If your EMI surpasses this limit, it's advisable to refrain from taking on additional loans.

This thumb rule suggests that the percentage of equity in your portfolio should be 100 minus your age. So, when you are 30, the equity portion of your portfolio should be 70 per cent. When you are 40, it should be 60 per cent and when you are 50, it should be 50 per cent, and so on. This thumb rule is based on the fact that equity investments deliver good returns over a longer time period as market volatilities even out. So at the start of your career, you should have a higher proportion in equity and reduce your equity exposure as you near retirement.

The purpose of a life insurance is to replace the income of the insured in case of his or her unfortunate demise. While there are ways to calculate your insurance requirements, the thumb rule is that you should buy life insurance that is equal to at least 10 times your annual income.

If you come into a sudden windfall, such as a lottery win, it's wise not to splurge all at once. While you might celebrate with a portion of the money, consider safeguarding the majority to avoid making impulsive decisions driven by initial emotions. Maintaining your usual lifestyle allows you time to carefully plan how best to use the funds wisely.

Often people start planning for their retirement in their late 50’s. Rather it should start at a very early age, more specifically once you start your job. Moreover, you should give priority to your retirement over your children’s education since they can get an education loan but you won’t get a retirement loan.

Divide 70 by the current inflation rate to know how fast the value of your investment will be reduced to half its present value

Eg. An Inflation rate of 7% will reduce the value of your money to half in 10 years.