In this article some simple Google Sheet Tools To Manage Personal Finance are explained, these are simple yet effective when followed diligently. The life of an individual largely depends on one’s relationship with money. Any person must learn how to manage money and its emotions to live a peaceful and happy life.
The role of money is to help us when we are in need and protect our living. Investing is a fundamental process of money. Investing requires patience and right investment choices. There are certain personal finance thumb rules one can easily follow.
Thumb rules to manage personal finance as follows
- Life Insurance Rule
- 3X Emergency Rule
- 50-30-20 rule for allocation
- 4% rule for financial freedom
- Rule of 72
- Rule of 114
- Rule of 144
- Rule of 70
- 100 - Age rule
- 10-5-3 Rule
Life Insurance Rule
Life Insurance is an important aspect every individual should have. It is only a risk protection and should not expect any returns from it. Many will have doubts what should be the right amount of life insure cover one should have. It is suggested a minimum of 20 times annual income.
Life cover = 20 * Annual Income.
3X Emergency Rule
In personal finance when our financial position is good, we should plan for not so good times as well. We should save a portion of money called as emergency fund. This emergency fund will help in adverse situation, income loss, health conditions and unforeseen conditions. This fund will help until we get back to our normal financial situation.
The ideal money to save in emergency fund is 6 months current monthly income.
Emergency fund = 6 * Current Monthly Income
50-30-20 rule for allocation
We plan our monthly budget, there will be opinions and discussions in family. To guide everyone and have a common goal there is a good practice. This rule is 50-30-20 rule of allocation.
of the total monthly income,
50% can be spent for needs – essentials
30% for wants – other miscellaneous expenses, travel, etc.
20% for savings – financial instruments
4% rule for financial freedom
What is financial freedom is most often misunderstood, if you can become independent of monthly income for your expenses and have multiple sources of income then you can consider that as a financial freedom.
At old age after retirement there is no pension in private sector, we have to build a corpus and we should be able to live a comfortable life without compromising on lifestyle. And this rules helps to identify what can be a ideal corpus. This is called as 4% rule for Financial Freedom.
25 times annual income can be considered as corpus.
Invest 50% in Fixed income instruments
Invest 50% in direct equity
You can withdraw 4% of total available corpus in a year (split this by 12 to withdraw monthly portion of it)
This should give us enough money for 30 years from the starting year of withdrawal.
Rule of 72 / 114/ 144 (Wealth Multiplication)
When it comes to investing we have to decide based on returns percentage which is a better investment option. Rule of 72 can be used as one of the calculation.
To identify the time duration in years, how much it will take for our money to double, we have to divide 72 by returns percentage.
Say 6% is returns from a fixed savings, then 72/6, it will take 12 years for our money to double.
No. of years to double = 72 / Returns percentage.
Similarly we can identify in how many years our money will triple, quadruple based on the return percentage as follows.
No. of years to triple = 114 / Returns percentage.
No. of years to quadruple = 144 / Returns percentage.
Rule of 70 (Inflation)
The value of Money reduces as time progresses. What is 1L today will cost 2L after 10 years. Just consider the cost of petrol, cost of education and compare it with what was 10 years before. you will spend more for the same thing as time progresses.
Now to understand in how many years our money value reduces by half we can use this rule, divide 70 by inflation rate published in India.
Money value reduces by half (in number of years) = 70 / Inflation rate
100 – Age Rule (Equity Investments)
Most beginners will have this doubt, how much money from their savings can be invested in equity (stock market) the basic thumb rule here is the earlier and younger you are, you can afford to take risk. Hence, the percentage is derived based on the age of investor.
Proportion of investment in equity = 100 – age
Generally risk in investment reduces as time progresses. It is measured in history that any invested money for more than 5 years, its risk reduces to 0. To grow your wealth and beat inflation, investing in equity is one of the best options available in India.
10-5-3 Return Expectation Rule
If you are aware there are multiple investment options in financial instruments itself. And returns from each of them varies. To have a fair expectation some numbers are given what should be our expectation through a rule called as 10-5-3 rule.
From this rule,
10% should be return expectation from equity
5% should be the return expectation from fixed instruments, eg: Fixed deposit.
3% should be the return expectation from savings accounts.
These are standard numbers and vary from time to time. But the order has never changed in any decade in the last century in growing markets like US & India.
All of the above rules are written as google sheet formulas and you can create a copy of it using this below link.
Personal Finance Tools (Thumb Rules),
All these rules are preliminary things to do. These are by no means complete financial planning and there is no guarantee it will suit your individual needs. Please talk to your financial advisor and for proper planning and investments.
To take part in Do it yourself Financial Planning Workshop please take a look at below link. Workshop fee is 999/- only. You will be able to create a complete action plan for your savings & investments.