Introduction

Personal finance is a term that encompasses managing your money, along with saving and investing. This term usually refers to the entire industry that offers financial services to individuals and households while advising you about financial and investment opportunities.

But if you are just starting your career and trying to figure out the best way to save money to achieve your goals, you might not be able to afford advisors.

Selecting the right investment opportunities and crafting an effective investment strategy to maximise your returns can feel daunting. So, as a rescue, there are several principles, often referred to as "thumb rules" that are commonly used in investing.

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These thumb rules can certainly provide valuable guidance, but you should not solely rely on these factors for your investment decisions. The critical variable in the equation is the expected interest rate. No investment product can guarantee the interest rate it will yield in the future.

In this article, let us explore three such thumb rules that will come in handy when managing your finances.

The Rule of 72

The Rule of 72 is a fundamental principle that investors, fund managers, and financial institutions apply to estimate how long it will take for investments to double. This straightforward and effective method can also be used to determine the required rate of return for your money to double.

Here's the formula:

Time for investment to double = 72 / Annual Rate of Return

For instance, if a mutual fund investment generates an annual return of 12%, your money will double in approximately (72 / 12) = 6 years. This rule is helpful for comparing various investment options, such as fixed deposits, bank savings, mutual funds, real estate, and more.

The Rule of 72 can also help you gauge how long it will take for your money to lose half its value due to inflation. For example, if inflation is running at 8%, your money will halve in approximately (72 / 8) = 9 years.

The Rule of 114

Following the rule of 72, there's the rule of 114, which provides insights into how long it will take for your money to triple in value based on the annual rate of return.

The formula is as follows:

Time for investment to triple = 114 / Annual Rate of Return

Using the same example of a mutual fund with a 12% annual return, your money would take approximately (114 / 12) = 9.5 years to triple.

The Rule of 144

Lastly, we have the rule of 144, which indicates how long it will take for your money to quadruple, becoming four times its original value. This rule is particularly relevant for long-term investors aiming to see significant growth.

The rule can be expressed as:

Time for investment to quadruple = 144 / Annual Rate of Return

Continuing with the mutual fund example at 14% annual return, your money would take approximately (144 / 12) = 12 years to become four times its initial value.

These calculations offer a rough estimate of a fund's performance in terms of time value. If you choose an investment with an 8% annual return, it will take 9 years for your money to double. However, opting for a scheme with a 9% annual return would result in your money doubling in just 8 years. This illustrates the significant impact of even a small difference in the rate of return on your investment timeline.

Summing up

These thumb rules can serve as informative benchmarks for investors. The rule of 72, rule of 114, and rule of 144 help you estimate the time it might take for your investments to double, triple, or quadruple, respectively.

Prudence is a cornerstone of successful investing, and you should conduct thorough research before embarking on your investment journey. You must note that these investment thumb rules are intended to be helpful guidelines, not rigid mandates.

Always keep in mind that a well-constructed investment portfolio aligns with your financial objectives while considering your risk tolerance and investment horizon. In essence, your investment strategy should be tailored to meet your unique financial goals and circumstances.

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