scorecardresearch6 essential personal finance rules that all millennials must follow

6 essential personal finance rules that all millennials must follow

Updated: 10 May 2022, 03:33 PM IST

Making personal finance decisions is not easy if you are not aware of certain ground rules that lay the foundation of the money that you save or the investments that you make or how much you borrow. Millennials talk of savings and investments all the time, but are they able to manage their finances correctly. 

Managing personal finances 

Managing personal finances 

Macro factors have had an unforeseen effect on both our savings and investments. Inflation has made things costly. The value of money is going down at a tremendous rate. We witness bloodbaths in our stock markets daily. Loan interest rates have gone up, which makes borrowings costly. The meagre rise in bulk term deposit rates does not make up for the losses due to inflation. These all things combined have underscored the need to have a financial plan in place for a more secure future. However, all this necessitates a sound judgement of finances including savings, loans and investments, thus, prompting the need for an understanding of personal finance and its nuances.

Millennials must be aware of certain basic rules of personal finance before they embark on their mission to save, invest and borrow.

The rule of 72

Not many realize how this basic formula taught to us in schools was the first gateway to understanding how much time it takes for our money to double. Everyone wants to see their savings doubling every few years not realizing that the current interest rate on our savings will not serve the purpose. To know the number of years it would take to double your money at the current interest rate, you must divide 72 by the yearly interest rate. For example, if the annual yield on your investments is 12 per cent, then the number of years it would take to double your money would be 72 divided by 12, i.e., six years.

This formula helps people to gauge the time it would take for their earnings and savings to double at a given rate of interest so that they may plan their investments and expenditures accordingly.

What is the rule of 72?

Rule of 70

Many people complain about how the value of their earnings and savings has gone down in the past few years. It is important to check how your money is devalued after every few years. It is the depreciation value of an asset that will tell you if it is worth your investment. To check how much time it would take for your investment to fall to half of its present-day value under the impact of inflation, you must divide 70 by the ongoing inflation rate. For example, with the current inflation rate looming at seven per cent, the value of your money would be reduced to its half in 10 years.

Don’t invest all in one bucket

“Don’t put all your eggs in one basket” is one of the oldest proverbs taught to us in school. How many of us have knew how this proverb has its implications for personal finance decisions too? To start with, do not invest all your savings in equities, but do not park all your money in fixed income instruments too. To manage your finances well, keep 50 per cent of your earnings into equity while putting the remaining amount in fixed income instruments. This way, you will be relieved from your tendency to waste your money on unnecessary expenses. The equities in your portfolio ensure returns in sync with the market while the fixed income deposits will ring in the necessary stability in the face of a sudden fall in the markets. While equity returns help beat inflation, debt instruments help you earn moderately average returns at regular intervals. You may then consider withdrawing four per cent from your bank savings deposits every year, thus, helping you sustain your money requirements.

Stock allocation rule

You do not allocate your money to assets randomly. Personal finance experts maintain that your age is an important factor in deciding the allocation of your assets. The thumb rule states that people must allot their savings to stocks in a percentage equal to 100 minus the age. This means that if you are 30 years old, you must invest 100-30 = 70 per cent of your earnings in stocks. This way you are left with 30 per cent of your earnings in debt funds and fixed income instruments. However, if you have reached 60 years of age, you must invest not more than 40 per cent (100-60) of your money in stocks with the remaining parked in fixed deposits and other similar instruments.

Emergency funds

In the mad rush to quickly invest your earnings as they come, do not forget to keep an emergency fund in place to pay off your contingent liabilities. Life is uncertain, which means that you must be ready to face and tackle the unforeseen. Personal finance experts maintain that they must allocate at least three times their monthly income to the emergency fund to face any exigency owing to loss of employment, medical emergencies, etc.

Buy life insurance

Death is a fact. We all will experience it someday. Losing a loved one can be painful. But the grief exacerbates when the family finds itself in financial distress on the sudden death of the family’s breadwinner. Make sure to have life insurance cover in place to financially secure the future of your loved ones. The minimum sum assured in your term insurance policy must be equal to at least 10 times your annual income. This means that if your yearly income is 10 lakhs, you must buy a term plan that promises a minimum sum assured of 1 crore.

Riders have a special place in life insurance. The policyholder’s family may find itself in unprecedented financial stress owing to sudden unemployment due to loss of limbs stemming from an accident or injury. Include a disability rider that makes up for the loss of income in case of injury due to accident, illness, etc. Adding on riders to the life insurance policy ensures a regular flow of money to the family members dependent on the policyholder’s income.


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First Published: 10 May 2022, 03:31 PM IST