Can't manage your money? Discover facts that will help you

Making personal finance decisions is difficult if you are unaware of certain ground rules that govern how much money you save, how much you invest, and how much you borrow. Millennials frequently discuss saving and investing, but can they properly manage their finances?

Many people lament their inability to save enough money for the future. Given the rising cost of living, the prospect of having enough retirement savings appears bleak. Apart from that, macroeconomic factors can have an impact on both our savings and investments. Money's value is rapidly declining. For example, even if you earn Rs 1 crore per year, it will take at least four years to accumulate a Rs 4 crore corpus after deducting taxes and living expenses. Because not everyone has access to such a large salary, the process of wealth creation is hampered. The only way out is to work harder, start saving earlier and invest wisely. Aside from that, understanding personal finance and its nuances may assist you in deciding your investments.

Rule of 72

Few people are aware that the fundamental formula we learned in school was the first step in understanding how long it takes for our money to double. Nobody realises that the present interest rate on their investments will not achieve the goal of seeing their funds double every few years.

You must divide 72 by the annual interest rate to determine the number of years it would take to double your money at the current rate of interest. By way of illustration, assuming your assets provide an annual yield of 12 per cent, it would take six years, or 72 divided by 12 per cent, to double your money.

By using this formula, users may estimate how long it will take for their income and savings to double at a specific interest rate, allowing them to make informed investment and spending decisions.

Rule of 70

Many people lament how their salaries and savings have lost value over the last several years. Every few years, it's critical to assess how your money is depreciating. You can determine whether an asset is worthwhile for your investment by looking at its depreciation value. You must divide 70 by the current inflation rate to see how long it would take for your investment to lose half of its current value due to inflation. For instance, if inflation continues at its current pace of 7 per cent, your money's worth would be halved in 10 years.

Focus on diversification

One of the oldest sayings we were taught in school is "Don’t put all your eggs in one basket." How many of us are aware of the ramifications of this adage for choices we make regarding our own finances? Start by not investing all of your savings in stocks, but also avoid investing all of your funds in fixed-income securities. Keep 50 per cent of your income in equity and invest the remaining 50 per cent in fixed-income securities to effectively manage your money. You will be freed from the temptation to spend money on useless expenses in this way.

Your portfolio's equity investments guarantee market-tracking returns, while the fixed-income deposits will provide the required stability in the event of a sharp decline in the markets. Debt instruments allow you to consistently earn moderately average returns while equity returns assist you to beat inflation. Then, to help you meet your financial needs, you can think about taking four per cent out of your annual bank savings deposits.

Age is an important factor

You do not distribute your funds to assets at random. Personal finance experts believe that your age is an important consideration when allocating your assets. According to the thumb rule, people should allocate a percentage of their savings to stocks equal to 100 minus their age. This means that if you are 30, you must invest 100 per cent of your earnings (100-30 = 70 per cent) in stocks. This leaves you with 30 per cent of your earnings in debt funds and fixed-income instruments. If you are over the age of 60, you must invest no more than 40 per cent (100-60 per cent) of your money in stocks, with the remainder held in fixed deposits and other similar instruments.

Save for emergencies

In your haste to invest your earnings as they come in, don't forget to set aside an emergency fund to pay off your contingent liabilities. Because life is unpredictable, you must be prepared to face and overcome the unexpected. Personal finance experts advise people to set aside at least three times their monthly income for emergencies such as job loss, medical emergencies, and so on.

Have insurance in place

Death is unavoidable. We will all go through it at some point. It is heartbreaking to lose a loved one. However, the family's grief is exacerbated when the breadwinner dies unexpectedly, causing financial distress. Make sure you have life insurance in place to financially secure your loved ones' future. Your term insurance policy's minimum sum assured must be at least 10 times your annual income. This means that if your annual income is ten lakhs, you must purchase a term plan with a minimum sum assured of one crore.

Riders play an important role in life insurance. The policyholder's family may face unprecedented financial strain as a result of unexpected unemployment due to limb loss caused by an accident or injury. Include a disability rider that compensates for lost income in the event of injury from an accident, illness, or other cause. Adding riders to a life insurance policy ensures a consistent flow of funds to family members who rely on the policyholder's income.

Many millennials have no thoughts other than earning and spending. This has taken a toll on their financial well-being because they are unable to save enough to meet their future needs, even in the face of inflation.