Financial Rules of Thumb

Like we have a rule of thumb for every thing, we have some rules of thumb for our personal finances too.

They are good pointers to help you understand and monitor your financial health.

Use them and they will help you in getting on right track with your finances.

How much money you should save?

Rule of Thumb: Save 10% for basics, 15% for comfort, and 20% to escape.

20% or 1/5th of your income, some say if your age 20 save 20%, 30 save 30% and so on.

The average saving rate in India is around 28%.

92% of this saving is in Bank and Post office.

TIP: If you need more money, then go out and make more money.

Remember Rule of 72: To determine how long it will take an investment to double, divide 72 by the

annual return and vice versa.

How much should you spend monthly?

Rule of thumb: 33% or 1/3rd of your monthly income should be the maximum bill for all the basic

expenses anything above it and you should budget.

TIP: Cover your Expenses.

How much you can borrow?

Rule of thumb: 2-3 times of your Net Annual Income.

Never borrow as far as possible more so if you are sole wage earner.

Understand the risk reward in renting and owning before going for home loan.

Calculate the cost per kilometer before going for a car loan.

As far as possible avoid personal loan or credit card.

TIP: Don’t gamble more than you can afford to lose.

How much you should spend to buy house?

Rule of thumb: Buy a house equal to 2.5 times of annual Income or all your EMIs should not be more

than 1/3rd of your monthly income.

TIP: Fools build houses wise men live in them.

How much you should have for emergencies?

Rule of thumb: Your emergency/cushion account should be equal to 3-6 months monthly expenses.

You should keep this money in saving account, if you do not have build up one today.

How much you should save for retirement?

Rule of thumb: You will need 70% of your pre-retirement Income as your post retirement expenses.

Your nest egg should be equal to 20 time of your annual income.

How much to borrow for a car?

Rule of thumb: If you must borrow to buy a car, follow the 20/4/10 rule.

Which means: Make a 20% down payment, don't borrow for more than four years and don't agree

to a monthly payment that's more than 10% of your income -- or 8% if you plan to buy a home in the

next few years.

TIP: Don’t pay interest on anything that loses value.

Other things worth knowing:

- No matter how much or how little you make, always save a little bit.

- Save hard for the first 10 years of your married life.

- Know the difference between needs and wants,

- To make money you need three things: income, discipline and time,

- Always have inflation and tax in mind,

- Always pay debt with the highest interest first,

- Do not close credit card accounts that are not in use, but cut the credit card,

- Subtract your age from 110, and then multiply that figure by 1.25, this is the maximum % of money

you can invest in Stocks,

- You should have Life insurance up to 8-10 times of your annual income.

- If you’re not willing to pay cash for it, then it doesn’t make sense to buy it on credit.

- If you use Credit card keep duplicate bills and pay them in time.

- Over a time horizon of more than 5 years Equity is the best asset class.

- Time in than timing is important if you are investing in Equity.

- Every decision has a cost attached with, a cost for taking decision, a cost for delaying decision

and a cost for avoiding decision.

- Do not throw good money after bad; understand the meaning of sunk cost and opportunity cost.

- Know the risk and take it. You'll almost certainly need to take some market risk if you want to grow

your wealth and beat inflation over time.

- Understand the concept of Time value of money.

- Compound interest is eight wonder of this world.

- Retirement money is for retirement, caution: do not disturb it.

- Priorities - Retirement, then credit cards, then emergency fund.