PERSONAL FINANCE MUSING 31 PLAY WITH NUMBERS- III FUN WITH THE RULES OF TRIPLE 15, 50:50 AND 5:25
PERSONAL FINANCE MUSING 31
PLAY WITH NUMBERS- III
FUN WITH THE RULES OF TRIPLE 15, 50:50 AND 5:25
Let me commence the post with the good news that my “author’s page” on Goodreads is now active. I will urge you to please visit my page and leave your comments on the book. For those who are not aware, Goodreads is the world’s largest site for readers and book recommendations. All the great books ever written can be discovered on Goodreads. I am providing the link for easy access below.
We are on to the third and concluding part of the trilogy of posts on “play with numbers”. It has been quite a discovery for me as well as I do my research to bring to you these fun numbers and I hope you are finding practical applications for the same. Since this post is in continuation of the last two week’s post, I am providing links for the sake of continuity.
The first fun rule is the “rule of triple 15” which you can use to mentally calculate long-term returns from your investments including mutual funds. If you invest Rs 15,000 per month for 15 years and manage a rate of return (ROR) of 15% (a tall order, I must say), you become a crorepati. Yes, your corpus touches the magic figure of Rs 1 crore with the investment of only Rs 27 lac. You can do mental math to get variations of this rule. For example, a 15*15*30 rule- if you invest Rs 15,000 per month, getting ROR of 15% for 30 years duration, your corpus grows to a humongous Rs 10 crore. So, please internalize the rule of 72 and triple 15 to harness the power of compounding in your personal finances.
The second rule is Sir John Templeton’s “rule of 50:50”. This is an extremely powerful rule which is a variation of the concept of “pay yourself first” which I had elaborated upon in my musing of 01 Apr 2018- the link is provided below.
For those who don’t know Sir John Templeton, he was an American billionaire investor who, in 1999, was called “arguably the greatest global stock picker of the century” by the Money magazine. His 50:50 rule was very simple- for every dollar of spending by him, he will save one dollar. In its very essence the rule talks of a 50% savings i.e. one must live on only 50% of income and save balance 50%. If you find this difficult to follow, there is more to come. Sir Templeton also said that if he had to buy, say, a TV worth Rs 50,000, he first had to save Rs 50,000 and set it aside. Imagine how difficult it will become when you have to buy a car or a house. But, Sir Templeton followed in the letter and spirit and that is what made him a billionaire. Incidentally, this rule of 50:50 is again gaining popularity in the FIRE (Financially Independent Retire Early) movement nowadays-more about the FIRE in one of my subsequent posts.
The next one is how to calculate the time required building up a “Breathing Fund”. I have covered this concept at length in my book- the “breathing fund” is a saving equivalent to roughly six months of your expenses, set aside for financial emergencies, which becomes the building block of your future wealth. So, if you want to roughly calculate the time it will take to save 1 month worth of expenses as you are building your breathing fund, simply take the percentage of take-home pay that you spend (say 80%) and divide it by the percentage of what you save (say, 20%). The result, 4 months, when multiplied by 6 (months) gives you the time required to save six months worth of expenses i.e. 24 months. Of course, this is just a thumb rule and the final results may slightly vary based on the ROR that you manage with your savings.
So, that brings us to the final rule of this trilogy of posts- Warren Buffett’s “Rule of 5/25”. I am sure that all of you would be familiar with Warren Buffett, an American business magnate, investor, speaker and philanthropist who serves as the chairman and CEO of Berkshire Hathaway. He is considered one of the most successful investors in the world and has a net worth of US $ 90.2 billion as of September 26, 2018, making him the third wealthiest person in the world[1].
The folklore says that Buffett gave this rule to his airline pilot Mike Flint. Buffet told Flint to write down his top 25 goals in life quickly and then deliberately strike out the bottom 20, which admittedly would have been a more difficult task. He then asked Flint to only concentrate on balance (top) 5 goals, firmly saying “No” to any activity which takes him away from his top 5 goals. This gives you the power of focus and is a variation of the famous “80:20 Rule”.
In financial life too, you earmark 5 activities/habits which make/save/invest money for you and concentrate on these. At the same time, earmark 5 activities/habits where you tend to waste money and ruthlessly eliminate them from your life. You may also like to read my posts numbered 26 to 28, published between 09 Sep and 23 Sep, where I have elaborated upon the magic of small savings.
That’s it for this week and as is customary an update on my book. “Musings of a (financially) illiterate father- a common investor’s guide to wealth creation and retention is scaling new heights every day besides generating a buzz and having great sales.
The book (paperback) is currently available domestically on Amazon.in, Flipkart, Infibeam and Notion press, and internationally on Amazon.com and Amazon.co.uk. The e-Book version is available on Kindle, Kobo, i-books and Google Books.
I am happy to announce that the book is now also available in major bookstores in the country including English Book Shop, Chandigarh, Rathee Media Centre, Jodhpur, Arya Book Store, Udaipur and Akanksha Book Depot beside other.
I will urge you to continue to share this post too as my book has been specially written to teach the alchemy of wealth creation and retention to our children-they deserve to learn it. Please support this mission of financial literacy by reading and recommending this book. The link is given below.
For now, enjoy your Sunday while reading my book- you have earned it.
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