10 Thumb Rules for Savings and Investments

A thumb rule is an easy way of simplifying your financial decisions, especially when you want to avoid doing maths for your financial planning. Although it may help you in day to day finances, some of them oversimplifies the complexities attached to your long term financial prospects. Retirement Planning is one such goal where a thumb rule will not work as it requires a fairly long term investments with regular review and monitoring.  In fact it requires a lot of math to get near to the correct picture. Similarly, there may be other aspects of your financial life where you cannot make decisions based on a thumb rule. But still, some of them have a good significance in a household financial decision-making.Thumb rules

Here are 10 rule of thumbs related to savings & investments :

1.Rule of 72: This is  a common used thumb rule to know in how many years your investment will get doubled. You simply divide 72 by the returns you are receiving to get the desired figure. So if you are expect  8% rate of return on your investment then in 72/8=9 years your investment will get doubled.

2. Rule of 69– A more accurate version of the above thumb rule. Divide 69 by the rate of return and add .35 to it. The result is the numbers of years your money will get doubled. So if you achieve 8% returns the doubling happens in 8.62+.35 i.e. 8.97 years.

3. Rule of 70Inflation impacts your investments and so the value will decrease in future. By using this thumb rule you can know the impact of inflation i.e. in how much time your investment value will be reduced to half. Divide 70 by the inflation you expect. So if you assume inflation of 6% then in 70/6 = 11.66 years value of your investment will reduced to half.

4. Rule of 114 – This rule tells you in how many years you money will get tripled. So for 8% rate of return on your investments, in 114/8= 14.25 years you can expect your value to be tripled.

5. Rule of 144 – Not so common  but in line with above it tells you the years your money will take to quadruple. So at 8% rate of return the money reaches the figure in 144/8= 18 years.

6. 100 minus your age– A very common thumb rule used by even agents and advisors for allocating exposure to equities is 100 minus age. So as per this rule if you are 25 then 75% should be in equities while if you reach 50 your exposure to equity should be limited to 50% of your investment portfolio. However, this thumb rule fails to account the unique financial situation and so will not work in all scenarios.

7. Pay Yourself First– Before you can reach for spending money, 10% of your net income should be saved for your long term goals such as retirement. An effective thumb rule which states that you earn to save for yourself and it should be the first priority.

4.10,5,3 Rule– A handy thumb rule which states that you should expect 10% from equities, 5% from bonds and 3% from cash. But these are far more conservative return then what you actually achieve and so many of us will not agree with it.

9. Emergency Fund Rule– Its necessary to plan for emergencies and most planners/advisors will guide you to have 3-6 month emergency fund. This is a very common thumb rule being used more effectively.

10. 4% Withdrawal Rule– This rule is reasonable for retirement withdrawals which states that you withdraw every year 4% of your investment portfolio with increasing it by inflation rate at every withdrawal. So if your invested portfolio is Rs 1 lakh then in first year you withdraw 4% of your invested portfolio i.e. Rs 4000 but next year you withdraw 4000 + 6% (240) = Rs 4240. This way you protect your principal by reducing the impact of inflation. However, the actual withdrawal rate will depend on your retirement needs and the performance of your portfolio.

Some of the above thumb rules may not apply to your financial situation and so may not always work. Rule like 100 minus your age may be relevant to a person nearing retirement but may not suit a young investor who has a long term goal of wealth accumulation. But emergency fund rule and pay yourself first are the rules which relates more to protecting your financial health in case of emergencies and ensuring you do not miss saving for your  long term goal. Both these rules help your financials in any situation of your lifecycle.

Thumb rules are easy to adopt as it involves an elementary math. But  before following any of them it’s wiser to have a comprehensive view and then take a decision.

Have you been following any of these thumb rule?How it has helped you in your financial decisions? Did you planned for any long term goal with a thumb rule?

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Comments

4 responses to “10 Thumb Rules for Savings and Investments”

  1. VIJAY JOSHI Avatar
    VIJAY JOSHI

    SIR,
    A.Y 2014-15 to file E return ITR-2,Page -10 Schedule TD-2[Referring- NOTE: 11B of Part Btt-I] what type of details to be put?]
    If no any Taxable Income but applicable U/s 54 TDS deducted for sale and repurchase, then sale process may showen in TDS-1 but 26 Qb details and deduction where to show?]
    Pl. advice required consultation.

  2. Vijay,

    If you are claiming refund on any TDS deducted on your income (apart from salary such as commissions, income from property, investment income like fd interest etc….) then you need to provide details of these TDS deducted in this column.

    TDS 1 is mainly for salary income so you cannot show property sale here. If you look at this sheet then there is TDS3 for details on TDS deducted on Immovable property. That’s where you will have to show details of TDS deducted on property.

  3. DINESH GOEL ADVOCATE Avatar
    DINESH GOEL ADVOCATE

    Long Term Capital Gain

    Plot No. 2795 12/03/2014
    Sales Consideration 6485000
    Less: Transfer Expenses 0
    6485000
    Less:indexed Cost
    Cost of Purchase 1060634
    F.Y. 2010-11 803100/711*939
    Exp. on Conveyance Deed 601950
    F.Y. 2013-14 601950/939*939
    Stamp Paper Exp. 98375
    F.Y. 2013-14 98375/939*939
    1760959
    4724041
    Deduction u/s 54 4724041
    4724041
    0
    Investment in House Property u/s 54 Rs. 1450000/-
    Amount deposited in Capital Gains Accounts Scheme u/s 54 6580000/-

    Note: sir, my ques. return m abhi file kar raha hu but Rs. 14.50 lac as a Advance payment investment in Residentioal Plot and Rs. 65.80 lac Payment on 15.10.2014 m computax m kis tarh show karu TDS 64850 bhi deduct hua h on sales

  4. Dear Dinesh,

    I am not a tax expert so will not be able to advise you in detail. Also in your situation you have made a payment for plot on which the house will be constructed (Only then you can claim exemption). Since you have deposited the amount in CGAS you will avail the exemption for this year.

    In current ITR forms (ITR 2) there is a sheet on capital gains where you have to mention all the details regarding amount claimed under sec 54, 54F and amount deposited in CGAS. There is also a seperate sheet for mentioning TDS details. If you input all the details this utility calculate the taxation for you.

    If you are not well aware on filling the ITR form then take assistance of a CA.

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