Seven simple rules to plan savings and investments amid market swings

Share markets rise at times and fall at others. In such conditions, investors ask where and how much to invest, how to grow their savings and how to deal with financial difficulties. A good income alone does not make one financially strong; planning how it is used is just as important. Often income is good, yet savings fall short because spending is not kept in check.

Some people begin investing but do not check how long it will take to build the wealth they expect. A few simple rules can help here. Seven rules in all, including the Rule of 72, Rule of 114, Rule of 144 and the 50-30-20 Rule, can be used to plan savings, investments and future financial goals.

The first is the Rule of 72. It shows how long an investment may take to double. The number 72 is divided by the expected annual return. For example, at an annual return of 12%, dividing 72 by 12 gives 6. This means money invested at this rate could double in about 6 years. To double money in just 4 years, an annual return of about 18% is needed. But there is no firm guarantee that such a return will be earned.

The second is the Rule of 114, which gives a first estimate of when money may triple. Here 114 is divided by the expected annual return. At 12% a year, dividing 114 by 12 gives 9.5 years. This means the sum could triple in about nine and a half years. The calculation is useful when setting long-term goals.

The third is the Rule of 144. It can matter for those who want to build wealth by investing over a long period. Here 144 is divided by the annual return. At 12% a year, dividing 144 by 12 gives 12 years. This means the sum could quadruple in about 12 years. However, the actual return depends on market performance and the investment option chosen.

The fourth is the 50-30-20 rule, considered useful for financial planning. Monthly income is split into three parts. Fifty per cent of income is kept for house rent, groceries, electricity bills, children's education and other necessary expenses. Thirty per cent can go on travel, shopping, entertainment and personal hobbies. The remaining 20% is set aside for savings and investment.

For example, if someone's monthly income is Rs 50,000, Rs 25,000 can be kept for essential expenses, Rs 15,000 for hobbies and Rs 10,000 for savings and investment. This way, needs and wants are met while money keeps accumulating for the future.

The fifth is the 100 Minus Age Rule. While investing, one has to decide how much money goes into risky options such as the share market and how much into relatively safer ones. Under this rule, one's age is subtracted from 100. The number left is the suggested share to put in equity. The rest can be kept in debt options.

At age 30, subtracting 30 from 100 leaves 70. By this formula, 70% can be placed in equity and 30% in debt. At age 50, the ratio could be 50:50. Still, this is only a rough rule. The actual ratio should take into account risk appetite, financial goals and the investment period.

The sixth is the Minimum 10% Investment Rule. Building large wealth does not require a large sum at the start. The habit of investing small amounts regularly can build a big fund over a long time. Under this rule, at least 10% of monthly income should be set aside for long-term investment. The amount invested should also be raised by about 10% every year.

If the monthly salary is Rs 40,000, Rs 4,000 can be invested each month. The next year this can be raised by 10% to Rs 4,400. The year after that, Rs 4,840 can be invested. The habit of raising investment as income grows can help in reaching long-term financial goals.

The seventh is the Emergency Fund Rule. Along with investing and saving, building an emergency fund is very important. Job loss, a medical emergency or a sudden large expense can cause financial hardship, and this fund then comes in handy. It is generally advised to set aside at least six months of essential expenses.

If a household's essential monthly expenses are Rs 30,000, it should have an emergency fund of at least Rs 1.80 lakh. This money can be kept somewhere it is easy to withdraw, such as a savings account or a liquid fund.

These seven rules show the importance of saving, investing and financial discipline. The Rules of 72, 114 and 144 estimate, on the basis of compound returns, how long money takes to double, triple or quadruple. The 50-30-20 rule and the 10% investment rule help in planning income, while the age-based equity-debt ratio and the emergency fund help in managing financial risk.

Still, no rule guarantees fixed returns from investing, or that lakhs will become crores. Market swings, inflation, taxes, charges and the type of investment all affect the final return. Decisions should therefore not be made merely in the hope of higher returns, but by looking at financial goals, risk appetite and the investment period. If needed, it may also be sensible to take the help of a financial adviser.