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Rule of '9-9-9' to make you rich - Views on News from Equitymaster
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  • Nov 25, 2011

    Rule of '9-9-9' to make you rich

    US Presidential nominate, Herman Cain, had come up with a program titled '9-9-9' aimed at reforming the US tax system. The program was proposed to help the US economy out of its financial troubles. In essence, it proposed to have a 9% income tax, 9% business transaction tax and a 9% federal sales tax. Hence the connotation 9-9-9. Whether the program gets approved or not, the connotation can actually be used in another way. As proposed by Forbes magazine, the rule of 9-9-9 can be used by people like us to increase our wealth. True, it is written keeping the people of America in mind, but we feel that if tweaked a bit, it is something that each of us can adopt in our lives.

    How does it work?

    Well it works in 3 steps. It helps to reduce your personal debt burden, reduces spending and increasing your saving. In short, it is the recipe of becoming richer.

    Let's take a look at the 3 steps involved.

    Step 1: Pay off all debts that have an interest rate of 9% or more.

    You may read this and go "Ha! With the increasing interest rates ALL the debts would fall in this category". Well that is actually true. So we are going to tweak this rule a bit. Pay off all debt that has an interest rate higher than what you can earn by investing in a relatively risk-free investment. We are referring to the returns on the investment which is what you earn by holding on to the investment over a period of time.

    The way this works is that suppose a relatively risk free investment gives you 12% returns (note we are talking of returns not the face value interest rate). And you have a loan on which you pay 11% interest. So it would be better for you to invest your money in the investment and use the interest income received to pay off the interest on the loan. Any loan that has a higher interest rate deserves to be paid back. Otherwise the interest liability just keeps on growing and your debt burden goes up over time (using compounding power of money ).

    So once you have identified the loans that need to be paid off first, the next question is how much money should you put aside to pay off such loans? This is where steps 2 and 3 come in.

    Step 2: Have at least 9 months of necessary expenses in savings

    Everyone has their monthly expenses. This includes basics like food, travel, clothing, housing, etc. Excluding expenses on luxury, it would be a good idea to work out how much you need each month. At any point of time, it is necessary to put at least 9 months of necessary expenses in savings. These should ideally be completely risk free and easy to get. A savings bank account or a fixed deposit are usually good places to park these savings.

    But here one may ask, with expenses going up almost daily, how does one set aside this huge quantum of savings?

    Well the idea is no different from what economists and experts prescribe for the countries. You have to adopt austerity measures. Prioritize your expenses and cut back on anything and everything that you may regard as unnecessary and wasteful. True it would mean that you like in a frugal manner for sometime but at the end if you are able to build up more funds, then the whole process is totally worth it. Initially it may seem difficult but saving at least 2 -3 months of expenses is doable to start with. As you move higher in life and continue following these rules in a disciplined manner, even the 9 months' savings become achievable.

    Step 3: Save 9% of your income each year for retirement

    So once you are done with saving up to meet your expenses, you should be saving at least 9% of your total annual income for retirement. Again, this looks like a low savings rate for us Indians. But this is the bare minimum that one should try to achieve. These funds should ideally be parked in long term investment options depending on your risk taking appetite. And these should be kept for a long period of time. Imagine the kind of funds you would have at the end of 10 years or 15 or even 20. The power of compounding comes in and the funds multiply over the time period.

    The balance that is left over is used to pay off your debt burden, which you have sorted out on the basis of the interest rates.

    Following these steps may seem difficult. But followed diligently and with discipline, it does become possible. And with these steps, you would soon be debt free and have sustained savings. This in turn can compound over time leading to larger wealth for you.



    Equitymaster requests your view! Post a comment on "Rule of '9-9-9' to make you rich". Click here!

    13 Responses to "Rule of '9-9-9' to make you rich"

    gurmit singh

    Dec 2, 2012

    I rarely find an article or advice for a senior citizen who has worked hard all his life, has enough savings now (does not need to save more now)and has more income than he can spend at his age, How should he manage his protfolio?



    Aug 27, 2012

    This is not at all Possible off late in India hwere inflation is rising every now and then.



    Dec 6, 2011

    yes it is very excellent idea of 9-9-9 rule.But when we earn more money we forget all the rules. in the time of recession only we think of the rules. so the people taking the hit of recesion should try to follow the rule.
    So start earning, start saving and live the life kingsize.



    Dec 3, 2011

    US has realized the savings scheme at the verge of their financial imbalance,where as in india we are following the saving schemes from ages from our fore fathers
    We Indians are strong in fundamentals of finance,and basic technical education which big Back bone for economy of our country pride india,
    Suresh -Bangalore



    Dec 1, 2011

    The one mentioned is a Golden Rule. Most of us know this but we dont follow or leave for next time and miss the bus. Go for it now!!!!



    Nov 30, 2011




    Nov 30, 2011

    I have a more simpler 1/3 rule.
    Your monthly expenses need to 1/3 of your salary, 1/3 should be savings (either capital acquisition - house, or equity or FDs) and the last 1/3 is for the Taxman.
    So every month you are allocating for 1 month of future post retirement.

    Like (3)

    Subhash Malhotra

    Nov 29, 2011

    This arbitary 9-9-9 rule might be helpful, but it sure will not make you rich. A saving rate of 9 percent a year will just keep you in a barely survivorship mode, at very best, in your retirement years. The correct number is probably in the 15 to 20 percent range. Another important concept being ignored here is to start saving and investing regurly for returement, at very young age, as soon as one starts working. Time is the biggest factor in building assets for retirement. The third concept of accumulating a diversified portfolio of assets (stocks, real estate,CD/bonds, etc) is equally important to plan for retrement years.

    Start saving and investing regularly TODAY !!

    Like (3)

    Jagannath D

    Nov 29, 2011

    999 is good idea for laymen.

    Like (3)

    Deepak Kumar Gupta

    Nov 26, 2011

    Yes ! i strongly endorse this concept of 9'9'9.

    This will strongly help any one , who want to become Rich.

    Like (3)
    Equitymaster requests your view! Post a comment on "Rule of '9-9-9' to make you rich". Click here!

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