In this video by Aditya Birla Mutual Funds, you will learn about the powerful phenomenon in investment called compounding. You will get to know why it’s important to spend the initial years building a strong foundation for accumulated wealth later on. Finally, we will take you through the three thumb rules for investing.
There’s no shortage of advice available online regarding personal finance. With so many websites offering tips and tricks, it can be tough to know where to start. That’s why it’s always great to take a step back and assess your overall financial situation. You can then understand whether you’re on the right track by following a few thumb rules for investing.
When it comes to financial planning, it’s important to remember that there is no one-size-fits-all solution. Thumb rules are generalizations that may or may not apply to you. However, thumb rules for investing will save time and improve your financial situation. Let’s take a look at these thumb rules:
1/ Equity – Debt Exposure in Investments Based on Your Time Horizon
People occasionally follow a rule of thumb that says your equity exposure should be (100 – Your Age). You must invest the remaining amount in debt or fixed-income securities. So, if you are 30, you should have 70% of your money (100 – 30%) in equity.
However, is this universally applicable?
A 30-year-old may have a lot of short-term financial objectives due to a significant life event, such as a wedding, a first kid, or purchasing a car, among other things. Having 70% of your stock exposure would be a terrible decision because there is no capital protection, and your money would be vulnerable to market volatility. If you need money quickly, you may lose money on your investments.
So which thumb rule is reliable in this scenario?
It may appear overwhelming but skip equity investments altogether if you have a goal like those listed above that are due within three years. Take into account those who had invested large sums of money in the Sensex at 20,000 levels. Even after three years, their investments would still be in the red.
If you’re looking to invest for a goal that’s more than three years away, you should consider putting money into equity. The longer the time frame for your goal, the more equity exposure you can have. For example, if you have five years to reach your goal, you could consider investing 60% in equity and 40% in debt. If your financial goal is ten years away, you could go for an 80-20 split between equity and debt. Your age doesn’t play as significant a role in this decision as you think.
2/ Rule of 72
The Rule of 72 is a simple way of calculating the time it will take for your money to double. Just divide 72 by the interest rate you expect to earn on your investment, and you’ll get the result of how many years it will take for your money to double.
For example, if you expect to earn a 9% return on your investment, it will take on average take eight years for your money to double (72/8 = 9).
3/ Save 15% and Invest at least 10% of your salary regularly.
Saving money is essential, but many people only save 10% of their income which isn’t enough. If you want to enjoy a secured financial future, you need to save more.
Due to this, you may have to cut back on some expenses, but this will be worth it. The more you invest right now, the more your money will grow. Compounding is a powerful tool, and you don’t want to miss out on its benefits.
It is essential to save and invest a portion of your income to reach your financial goals. At a minimum, aim to save and invest 25% of your take-home salary. Depending on your goals, you may want to adjust the percentage of your income that you save and invest. As your salary increases, remember to increase your savings and investments proportionately.
Conclusion
When it comes to rules for investments, stay invested irrespective of market ups and downs and start early. As long as you get your monthly income, don’t stop investing. Consider hybrid fund investments or fund of fund investments if you are inclined towards a low-risk zone.
Interested in how we think about the markets?
Read more: Zen And The Art Of Investing
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