When it comes to dealing with financial matters, there are various rules that you may have heard financial experts discuss. These rules exist for one reason...to help make it easier for you to understand the language of money. So many of us have this fear of not knowing what to do or where to start when it comes to our financial game plans. These rules can most certainly help with both of those issues. Here are some timeless financial rules that you may or may not have heard of, but should definitely familiarize yourself with.
The Rule of 72 - this rule epitomizes the essence of investing. Have you ever heard someone say "high risk, high return"? Well the exact opposite of that is also true, low risk, low return. The rule of 72 helps you determine how long it will take your money to double. Here's how it works: if you were to invest $100 with an interest rate of 9%, it would take 8 (72/9 = 8) years for the investment to be worth $200. In that same scenario, if you invested that same $100 with an interest rate of 3%, it would take 24 years (72/3 = 24) for it reach that same $200.
The Rule of 219 - many people have trouble determining how much money they should save for retirement. At a minimum, you should set your retirement goal at $219,000. Why $219,000? Well, have you ever given any thought to how much it's going to cost you to eat in retirement. The rules assumes the following...It's you and a spouse/partner/significant other (2 people) and you eat 3 meals/day at $5/meal. There are 365 days in a year and you will do this for (20) years. Thus 2 x 3 x 5 x 365 x 20 = $219,000.
The Rule of 100 - you can determine what percentage of your assets should be invested in the stock market by subtracting your age from 100. For example, if you're 30 years old, you should put 70% of your assets in stocks or mutual funds. Please note that this rule is typically broken because every 30 year old person may not have the same appetite (risk tolerance) to take on that much risk in their portfolio. Consult your financial planner and do a thorough risk assessment.
The 50/20/30 rule - the old school way of budgeting not working? This budgeting strategy takes a look at your income and divides it into 3 categories. Once you get your paycheck(s), no more than 50% of it should be spent on essentials…your rent or mortgage/food/transportation/utilities. 20% should be applied to financial obligations…savings, retirement, insurances, investments, paying off debt. 30% is allocated to your lifestyle…so whatever else you want to spend your money on, it’s up to you!