The general financial rules come quite handy while dealing personal finance matters. The financial rules help us in making quick financial decisions. The financial rules also give us a direction in personal finance space. The majority time span of our life is devoted towards earning. Still we find it difficult to understand how to manage the money we earn to meet different life goals. The general financial rules make this process easy.

Lets look at some of important financial rules which you can understand easily and implement in your life.

1) Pay yourself first

This is the most important general financial rules. Whenever income comes to our hand be it salary, bonus, business income, interest receipt, our tendency is to spend. Human wants are unlimited. Therefore, thought of spending to meet those wants always come first. But the right approach is to save or invest first. It is called “pay yourself first.”

In other word, income minus investment should equate to expenditure. It should not be other way round. You need to identify the goals first for which you want to invest. Commit to it and keep investing unit you meet the goal. Then set new goals.

2) Save/invest 30% of net income

The portion of take home salary or income that should go toward investment is 30%. This is one of very important financial rules. Take home salary or net income is after subtracting the statutory deduction like PF contribution, tax, EMI on home loan, car loan etc. It is also known as disposable income. The 30% limit is most ideal. It may vary by 5% upward or downward.

Since expenditure increases in middle age, a higher percentage should be saved in early earning life. Further, mere saving is not sufficient. It should be invested in efficient financial product as per personal risk appetite.

3) 6 months net income as emergency fund

This  is another general financial rules that we all need to follow. As one start earning, a portion of the net income should be kept aside as emergency fund. It comes handy in case of medical emergency, appliance break down, accident, job loss etc. As per general financial rules, this fund should be equivalent to at least six time of current net income. Higher the better. As one progress in his/her career or business, the earning also goes up. Accordingly, the value of this fund should also proportionately increase. This fund may be kept in saving account or in Liquid mutual funds.

4) 10 times of annual net income (ANI) as Life cover

Most of the people combine insurance with investment. However, one should take pure term insurance if he or she has dependent. The value of such insurance should be at least 10 times of ANI of the earner. There are different method and ways to calculate insurance cover such as a) Human life value method, b) Income replacement method, c) Expense replacement method and d) Underwriter’s thumb rule. These methods require detailed calculation. Therefore, the last one is most common to use as a general financial rules.

5) 20 times of ANI to save for retirement

One should target to accumulate 20 times of his or her ANI at the time of retirement. The estimation of the same require a details calculation. It’s a function of current income, no. of years left to retire, likely liabilities and expenses at the time of retirement. However, you can roughly arrive at ANI at the time retirement by multiplying current ANI by numbers years left for retirement divided by 7. This is a general financial rules.

For example, if your current ANI is ₹9 lakh and you have 15 years to retire, than ANI at the time of retirement will be ₹9X15/7=₹19.28 lakh. Therefore, the retirement corpus should be 19.28X20=₹3.86 crore. A financial advisor will give a back calculation indicating how much you need to invest monthly now to accumulate that corpus by the time you retire.

6) value of your house 3 times of ANI

The general financial rules for value of house that your propose to buy should be maximum 3 times of your ANI. If you and your spouse both working or earning than it should be combined value of ANI of both.  If you are earning ANI of ₹9 lakh, the value of the house property should be around ₹27 lakh. If your spouse is earning ANI of ₹5 lakh, then the value of the house property should be around [9+5]X3=42 lakh.

The value of the property may increase subsequently due to market appreciation. We generally aspire for better house and rationalise it by giving weightage to location, society, size etc. Thereby stretch our finance, which is not advisable.

7) Price of the car half of ANI

Car is one of the most obsessed asset class in any family. The choices of car in market are also numerous. Therefore, we often end up buying a car that we want but do not need. The general financial rules for buying car is that its price should not be more than half of ANI.

8) 20/4/10 rule to purchase car

If you are buying a car with bank loan than target to pay atleast 20% as down payment, loan period maximum 4 years and EMI cost not more than 10% of monthly net income.

9) EMI cost 36% of gross monthly income

Ideally there should not be any EMI cost in any one’s life. However, in modern living it is nearly impossible to avoid EMI. Therefore, the general financial rules for EMI is 36% of gross monthly income. One should not be laden with liabilities, especially salaried people. When we buy anything on EMI, we end up paying nearly 40% more then the original cost. EMI is a leakage in one’s income which makes him or her poorer to that extent.

10) Investment

General financial rules of

a) Rule of 72 : Divide 72 by rate of Interest (RoI) to know in how many years the investment will become double.

b) Rule of 114 : Divide 114 by RoI to know in how many years the investment will become triple.

c) Rule of 144 : Divide 144 by RoI to know in how many years investment will become Quadruple.

d) Rule of 70 : Divide 70 by current inflation to know in how many years your investment will become half.

e) Rule of 100 : Subtract your age from 100 to know what percentage to allocate towards equity.

f)  Rule of 50, 30, 20 : Out of ANI, spend upto 50% towards household needs, 30% towards saving/investment and 20% towards entertainment & other needs.

The above general financial rules are indicative.  It may very under different scenario. However, the efforts should always be to follow above rules. A person can be financially successful only when he or she follows the 6 step financial planning principles.