8 Rules to Raise Your Financial Wisdom

Looking to make your money work harder for you? Whether you're dreaming of early retirement or just want to see your savings grow, getting a handle on smart investment strategies is key. It's not just about picking the right stocks, funds or any other asset class; it is crucial to have a game plan that covers all bases. Here are eight tried-and-true rules that can help you invest wisely, avoid common pitfalls, and reach your financial goals successfully.

The Emergency Fund Rule should be the first rule you need to follow. Always, ensure you have three to six months' worth of living expenses set aside. It protects you from unexpected financial storms, allowing you to face any short-term setbacks without necessarily tapping into your long-term assets. Keep this money accessible in a savings account.

The ‘Rule of 72’ helps you roughly calculate how long it takes your money to double. Dividing 72 by your annual return, is the approximate number of years it would take. This rule is the best example of how compounding works and acts as a quick mental calculation for estimating its impact. e.g., if you invest AED 10,000 at 14.4% annually, it will take you (72/14.4=5) years to make it AED 20,000.

Subtract your current age from 100, and the result is the share of your portfolio you should allocate to equity and rest to debt assets like Fixed Deposits, bonds, etc. By a gradual shift towards lower-risk investments as you age, this trick helps you grow your wealth safely and balances your risk tolerance. Eg - At the age of 65, 35% of your investments should be in equity and the remaining should be in less risky assets.

The Dollar-Cost Averaging (DCA) strategy involves investing a fixed amount at regular intervals, like a monthly subscription or SIP (Systematic Investment Plan). This way, you buy more shares when prices are low and fewer when they're high. It's like getting a sale on your investments, smoothing out the impact of market fluctuations, and setting you up for long-term success.

Using the 4% Rule can help you chart out a sustainable old age, ensuring funds last you for 30 years post retirement. The rule states, you withdraw 4% of your retirement portfolio annually, adjusting for inflation. The 4% rule aims to strike a balance between enjoying your retirement years and preserving your savings for the long run.

Embark on homeownership without compromising your financial stability. This rule has three parts:
a. Don’t take a home loan that results in annual EMIs of more than 30% of your annual income.
b. Before buying a home, have at least 30% of the total home value saved in cash or low-risk assets. This should cover the 20% down payments, and 10% should be a cash buffer.
c. The price of your home should not exceed 3 times your annual gross income (individual or entire household).

This rule recommends making a 20% down payment on the car, taking a car loan for not more than 4 years, and keeping transportation costs (Car loan EMI, fuel, other repairs) under 10% of your monthly income. While it may not always be possible to follow the rule, it may make sense to consult it for a reasonability check before buying a car, especially for new expats who might still be wrapping their heads around the value of the currency.

Mitigate your risks with the Rule of Three. It is advised to diversify across at least three different asset classes. A few different asset classes are stocks, bonds, gold, fixed deposits, real estate, etc. This strategy aims to balance your investments and reduce the impact of a poor-performing asset class on your overall portfolio, ensuring a resilient and safer investment approach.

Adopting these rules can give you direction in the complex world of money and finances. While no rule is a sure-shot guarantee of success, understanding and applying them can significantly enhance your financial decision-making and set you on the path to a more secure and prosperous future. It is always advisable to consult experts in the field before making any investment decisions.