It is true to say, choosing the right investment plan as per our goal and needs is all that we care about. However, what matters most is investing with the right mindset. Now, we have certain rules for investing to get a better outlook on your investment practices.
Having said that, it does not mean what you have been doing is wrong or these unspoken rules for investing is what you have to follow to get great returns. What these rules imply is simple knowledge to help you get even better results in the long run.
- Rules for Investing #1 : Rule of 72
- Rules for Investing #2 : Rule of 114
- Rules for Investing #3: Rule of 144
- Rules for Investing #4: Minimum 10% Investment Rule
- Rules for Investing #5: 100 Minus Age Rule
- Rules for Investing #6: Rainy Day / Emergency Funds
- Rules for Investing #7: 4% Withdrawal Rule
- Key Takeaways
There is no certain or exact principle or rule to help you get a cent per cent guaranteed return on your investment. These rules serve as Informational Guidelines which you can follow to experience an enriched investment career.
Disclaimer: This blog is for informational purposes only. We do not recommend you to follow only these rules while investing in the market.
Rules for Investing #1 : Rule of 72
In simple words, this rule determines how long it will take for your money to double.
Let’s take an example for the same, we assume you have invested 1,00,000 with an expected rate of interest of 10% per annum. In how many years will your money double?
The rule says, if you divide 72 by the expected rate of interest, you will get the time in which the amount will get doubled.
Doubling Time = 72/Rate of Return
In the example above, the expected rate of return is 10% p.a. Therefore,
Doubling Time = 72/10 =7.2 years
Hence you can expect your money to get doubled in about 7.2 years.
It is utterly important that this rule is applicable where you receive compound interest on your investments.
Alternatively, you can use the Rule of 72 to find out the interest rate at which you would get your money doubled.
For Example, if you want your investment to double within 6 years. Then,
Doubling Time = 72/Rate of Return hence, Rate of Return = 72/Doubling Time = 72/6 =12% p.a.
Rules for Investing #2 : Rule of 114
Just like the above Rule of 72, if you want to know when your investment will get tripled, follow the Rule of 114.
Use the above mathematics to get the desired results for Rule of 114.
Rules for Investing #3: Rule of 144
Again, you want to know when your investment is going to get quadrupled, great, kindly follow the Rule of 144 and you will get there.
Kindly follow the same mathematical expression as used for Rule of 72, Rule of 114 and you will find your answer.
Important to note – You can also use the above mathematics formula to determine the expected rate of interest you would require to triple or quadruple your investment.
Rules for Investing #4: Minimum 10% Investment Rule
We all want to get rich, instantly. Knowing this would require a huge stroke of luck or a casino win. Until then, we have a Rule for you all to get rich eventually. This rule focuses on starting to save or invest early, as soon as you start earning you should start saving/investing 10% of your income.
If you want to benefit from the power of compounding, you should better start it soon if haven’t already and on top of it, increase your saving/investment by 10% every year thereafter, and soon you will be rich,very rich.
Rules for Investing #5: 100 Minus Age Rule
This rule helps in determining the asset allocation of your funds in either Equity or Debt, depending on your age, this rule will help you in knowing how much percentage you should invest in either.
So, to determine the results for your investing types, let’s assume you are 30 years old and planning to start investing. According to the 100 minus Age Rule,
100-30 = 70%.
Now, the result is the value for your Equity Investments and the remaining balance is what you need to invest in Debt Funds.
- Equity = 70%
- Debt = 30%
The idea behind this rule is that your Equity portfolio should reduce as you age along, hence increasing a more stable and safe portfolio for you.
Read more on MFgrow Blog – Types of Mutual Funds
However, it is highly advised to kindly do your market research and not to blindly follow any of these thumb rules. They are more for your information purposes.
Rules for Investing #6: Rainy Day / Emergency Funds
As our parents often mentioned to save for the rainy day, this rule tells us exactly the same thing. We should allocate some emergency funds equivalent to 3-6 months of our expenses.
These funds should be liquid and easily accessible during an emergency or cash crunch.
Rules for Investing #7: 4% Withdrawal Rule
Now, here we have a rule which is more like a financial discipline, which could be followed by everyone. It is worth mentioning about 4% withdrawal Rule. We have been reading to save, invest to leave a better retirement life, but how often do we include inflation in our calculations?
Since, inflation rates being unpredictable, we can burn a hole in our pockets pretty easily over time.
Hence, comes the 4% withdrawal Rule to help you run through the times. This rule states that if you withdraw 4% from your retirement corpus every year, you will be able to maintain your living costs.
For example, if your retirement corpus is of Rs. 1 Crore, then you must not withdraw more than 4 Lakh per year.
- Rules for Investing #72,114,144 helps you to determine when you can get your invested money Double, Tripled or Quadrupled.
- Follow the 10% minimum Rule to start investing.
- Always, take care of your emergency fund and start saving some money for the rainy day, it will only help you.
- USe 4% withdrawal rule to make sure your financial freedom outlast your age.
- USe 100 minus Age Rule, to determining your investment portfolio.
Not to forget, these are just Rules for investing, and life is not only about rules and laws. You live a free life, adventurous enough to tell stories when you get old and hence, do not blindly follow the rules, but use your resources and brainpower to help yourself become a better investor, become more knowledgeable.