Managing money effectively is not just about earning; it’s about how you manage, save, and invest to ensure financial stability and growth.
Money rules are the guiding principles that help us make informed financial decisions. These rules are timeless and applicable whether you’re a beginner in money management or a seasoned professional.
In this blog, we’ll dive deep into essential money rules, supplemented with examples, to provide actionable insights for readers.
1. The 50/30/20 Rule of Budgeting
The 50/30/20 rule is a simple yet powerful way to manage your finances. Here’s how it works:
- 50% of your income: Allocate to needs like rent, groceries, and utility bills.
- 30% of your income: Spend on wants such as dining out, entertainment, or hobbies.
- 20% of your income: Save or invest for the future.
Example:
If your monthly income is ₹50,000:
- Needs: ₹25,000 (Rent: ₹12,000, Groceries: ₹6,000, Utilities: ₹7,000)
- Wants: ₹15,000 (Dining out: ₹5,000, Travel: ₹5,000, Subscriptions: ₹5,000)
- Savings/Investments: ₹10,000 (Fixed Deposit: ₹5,000, SIP: ₹5,000)
By following this Money rules, you ensure a balanced approach to spending and saving.
Also Read : Budgeting 101: A Step-by-Step Guide to Taking Control of Your Money
2. Pay Yourself First
One of the most crucial money rules is paying yourself first. Before spending on anything else, allocate a portion of your income to savings or investments. This creates a disciplined habit and ensures financial growth.
Example:
Suppose your salary is ₹60,000 per month. Commit to saving 15% of your income, i.e., ₹9,000, before paying bills or other expenses. Over a year, this amounts to ₹1,08,000, excluding interest or investment growth.
3. Avoid Debt or Use It Wisely
Debt can be a financial trap if not managed well. Follow these Money rules to Manage debt wisely:
- Use credit cards only for purchases you can pay off in full each month.
- Avoid high-interest loans unless necessary.
- Prioritize paying off debts with the highest interest rates.
Example:
- Good Debt: Taking a home loan at 7.5% per annum for ₹40 lakhs can be considered good debt, as the value of real estate tends to appreciate.
- Bad Debt: Using a credit card to buy gadgets worth ₹1 lakh and rolling over the balance at 36% annual interest will cost you ₹36,000 extra in a year.
4. Emergency Fund is Non-Negotiable
An emergency fund acts as a safety net in unexpected situations such as medical emergencies or job loss. Aim to save 3-6 months’ worth of living expenses.
Example:
If your monthly expenses are ₹40,000, an emergency fund should ideally be ₹1,20,000 to ₹2,40,000. You can build this by saving ₹5,000 monthly for 2 years.
5. Compounding: Start Early
The power of compounding lies in reinvesting your earnings. The earlier you start, the more you benefit.
Example:
If you invest ₹5,000 monthly in a mutual fund with a 12% annual return:
- Starting at age 25, you’ll have ₹1.76 crores by age 60.
- Starting at age 35, you’ll have ₹55 lakhs by age 60.
The difference? A whopping ₹1.21 crores!
Also Read : Unleash the Power of Compound Interest
6. Know the Rule of 72
The Rule of 72 helps you estimate how long it will take for your investment to double at a fixed annual return rate. Divide 72 by the interest rate to get the time in years.
Example:
At an 8% annual return, your investment will double in 72 ÷ 8 = 9 years. If you invest ₹2 lakhs, it will become ₹4 lakhs in 9 years.
7. Insurance is Protection, Not Investment
Insurance is meant to secure your financial future, not to generate returns. Term insurance, health insurance, and accidental insurance are essential. Avoid mixing insurance with investment.
Example:
- Term Insurance: A ₹1 crore term plan for a 30-year-old may cost around ₹10,000 annually.
- Endowment Plan: The same premium may yield a ₹5 lakh sum assured, which is insufficient.
Choose term plans for coverage and invest the difference in mutual funds.
Also Read: Smart Strategy to reduce Life Insurance Premiums
8. Diversify Your Investments
“Don’t put all your eggs in one basket.” Diversifying investments across asset classes like equities, fixed deposits, gold, and real estate reduces risk.
Example Portfolio:
- Equities: ₹3 lakhs
- Fixed Deposits: ₹2 lakhs
- Gold: ₹1 lakh
- Real Estate: ₹10 lakhs
This allocation ensures that if one asset class underperforms, others balance the impact.
9. Track Your Expenses
Keeping track of your expenses is crucial to identify unnecessary spending. Use budgeting apps or maintain a ledger to monitor where your money goes.
Example:
If you spend ₹500 daily on coffee and snacks, it totals ₹15,000 monthly. Cutting back to ₹250 daily can save you ₹7,500 monthly, i.e., ₹90,000 annually.
Also Read : Effective ideas to Track Expenses
10. Invest in Your Knowledge
Financial literacy is one of the best investments you can make. Learn about stocks, mutual funds, and tax-saving instruments to make informed decisions.
Example:
Spending ₹5,000 on a certified financial course can save you lakhs by avoiding bad investments or tax penalties.
11. Don’t Chase Trends
Avoid falling for get-rich-quick schemes or chasing market trends blindly. Focus on long-term financial growth through consistent, disciplined investments.
Example:
In 2021, many individuals invested heavily in cryptocurrencies without understanding them. Some lost lakhs when the market crashed in 2022.
12. The Rule of Inflation
Inflation reduces the purchasing power of money. Ensure your investments generate returns higher than inflation to maintain your financial health.
Example:
If inflation is 6% annually, ₹1 lakh today will be worth only ₹74,409 in 10 years. Investing in equity mutual funds with a 12% return can help you stay ahead.
Also read : Best ways to Beat Inflation
13. Set Financial Goals
Define short-term, medium-term, and long-term financial goals. This clarity helps you prioritize and allocate resources effectively.
Example:
- Short-term Goal: Save ₹1 lakh for a vacation in 1 year.
- Medium-term Goal: Accumulate ₹10 lakhs for a car in 5 years.
- Long-term Goal: Build a retirement corpus of ₹2 crores in 25 years.
14. Beware of Lifestyle Inflation
As income increases, so does spending. Avoid falling into the trap of lifestyle inflation by maintaining a simple lifestyle and increasing savings instead.
Example:
If your salary rises from ₹50,000 to ₹75,000, save at least 50% of the increment (₹12,500) instead of upgrading all your expenses.
15. Never Ignore Taxes
Understand the tax implications of your earnings and investments. Use tax-saving instruments like ELSS, PPF, or NPS to reduce your liability.
Example:
Investing ₹1.5 lakhs in PPF under Section 80C can save you up to ₹46,800 in taxes annually (for those in the 30% tax slab).
16. Live Below Your Means
Living below your means is the foundation of wealth creation. Spend less than you earn, regardless of how much you make.
Example:
If you earn ₹1 lakh monthly, spending ₹70,000 and saving ₹30,000 is smarter than spending ₹95,000 and saving ₹5,000.
17. Automate Your Savings
Set up automatic transfers to your savings or investment accounts as soon as you receive your income. This eliminates the temptation to spend first.
Example:
If ₹10,000 is automatically debited to your mutual fund SIP on the 1st of every month, you’ll build wealth systematically without effort.
18. Reassess and Adjust Regularly
Your financial goals and circumstances change over time. Regularly review your budget, investments, and expenses to ensure they align with your goals.
Example:
If you were saving for a car but now need funds for a house down payment, redirect your investments accordingly.
Upshot
Money rules are not about restrictions but about empowering you to make better financial decisions. By incorporating these principles into your life, you can build wealth, achieve your goals, and secure a financially stable future. Remember, financial success is a journey, not a destination. Start today, stay consistent, and watch your financial health flourish.
This guide provides actionable money rules with relatable examples in rupees. Follow these principles, and you’ll be on your way to financial freedom.
Disclaimer: Financepanga provides informational content only and does not offer financial advice. Always consult a professional before making financial decisions.
