Being a millennial in today’s fast-paced world comes with its unique set of financial challenges. Balancing student loans, housing costs, and planning for the future can be daunting. To help you navigate these financial waters, here are five essential financial rules, which can come in handy for every millennial:
1. The 50/30/20 Rule:
Understanding the importance of budgeting
If you’re unsure where to start, the 50/30/20 rule is an excellent framework. Here’s how it works:
- 50% for Needs: Allocate 50% of your income to cover essential needs. This includes expenses like rent or mortgage, utilities, groceries, and transportation. By ensuring half of your income goes toward necessities, you’ll maintain financial stability.
- 30% for Wants: This 30% is for your discretionary spending. It covers things like dining out, entertainment, and hobbies. Allocating a portion of your paycheck for fun and leisure ensures you don’t feel deprived and can enjoy life in the present.
- 20% for Savings: The remaining 20% should be directed toward your savings. This is where you prioritize your financial future. You can save this portion in various accounts, such as an emergency fund, retirement accounts, or other investments.
This rule helps you balance your financial priorities while enjoying a reasonable quality of life.
2. The Rule of 72:
Understand the Power of Compounding
The Rule of 72 is a simple but powerful concept that helps individuals understand the power of compounding when it comes to investments and savings. It is a rule of thumb that provides a quick estimate of how long it will take for an investment to double in value based on a fixed annual rate of return.
For example, if you’re earning an 8% annual return on your investments, your money will double in approximately nine years (72 ÷ 8 = 9).
If you have specific financial goals, knowing how long it will take for your investments to double can assist in long-term planning. It can also help you assess the risk and potential returns of various investment opportunities.
3. The 100-Age Rule:
Tailor Your Asset Allocation
The 100-Age Rule is a fundamental principle in the world of financial planning, aimed at helping individuals make informed decisions about their asset allocation as they progress through life.
The rule is simple: subtract your age from 100 to determine what percentage of your portfolio should be invested in equity which is considered more aggressive and a higher-risk investment. The remaining percentage is invested into lower-risk assets such as bonds.
For instance, if you’re 30 years old, the rule suggests that 70% of your investments should be in stocks, and the remaining 30% in bonds. As you age, the idea is to gradually shift towards a more conservative allocation to reduce exposure to market volatility and protect your wealth. However, it’s crucial to remember that the 100-Age Rule is just a starting point and should be adjusted based on individual financial goals, risk tolerance, and market conditions.
4. The 6X Emergency Rule:
Prepare for the Unexpected
The “6X Emergency Rule” is a prudent financial strategy designed to equip individuals with a safety net for unforeseen financial crises. It advises that you should have an emergency fund amounting to at least six times your monthly expenses.
This rule acknowledges the unpredictable nature of life, where unexpected events like medical emergencies, job loss, or major home repairs can strain one’s finances. By adhering to this rule, individuals can ensure they have a substantial cushion of savings to fall back on during challenging times, mitigating the need to resort to high-interest loans or deplete their long-term savings.
The 6X Emergency Rule not only offers financial security but also peace of mind, reducing stress and allowing individuals to focus on resolving the issue at hand.
5. The 40% EMI Rule:
Manage Debt Responsibly
The “40% EMI Rule” is a financial guideline that recommends allocating a maximum of 40% of one’s monthly income towards Equated Monthly Installments (EMIs) for loans and debts.
By adhering to this rule, individuals can prevent overcommitting their income to debt, leaving room for savings, investments, and unexpected expenses. It promotes responsible borrowing and ensures that EMI payments remain manageable, reducing the risk of financial strain and defaulting on loans.
These five financial rules provide millennials with a strong foundation for managing their finances effectively. By creating a budget that balances need, savings, and discretionary spending, understanding the power of compound interest, tailoring asset allocation, building an emergency fund, and managing debt responsibly, millennials can work towards building a secure and a brighter future. Embrace these rules, and you’ll be better equipped to navigate the financial challenges that come your way.