Rule of Thumb for your Personal Finance

[alvin]

There are a few popular rule of thumb when it comes to managing money. I would say they do ensure you will be financially sound if you follow them.

Do not chalk up debt more than 35% of your income

Banks use 35% as your borrowing limit when approving your loan applications. This means that your monthly repayment towards any form of debt should be below 35% of your gross salary. The debts can be car installment, housing loans, outstanding credit card bills, etc. This rule is to protect you from taking too much debts. Breaking this rule will likely undermine your ability to save and you may find yourself paying debts for the rest of your life.

Save at least 10% of your income

As the parable from “The Richest Man In Babylon” says, “For each ten coins I put in, to spend but nine.” Always save at least 10% of your income. This is actually the very first step one should take to be well financially. The correct way to save is to pay yourself first. Always put aside 10% of your pay in another bank account (apart from the account that your salary credits into) immediately when you receive it. The account with the purpose to save should have minimal facilities, ie. without cheques, debit cards linking to it. This is to make it difficult for you to withdraw the money.

Do not commit more than 10% of your income into insurance

Do not under-insure but do not over-insure too! Many people treat whole life insurance as a form of savings. It is wrong! To me, insurance is a cost, it is not investment. One should not try to kill two birds with one stone. There isn’t anything is this world that sounds so good - you can have comprehensive protection while the same pool of money grows rapidly. Remember, buy what you need to protect as protection is a cost. It must be a needs driven requirement. Do not buy insurance to save (and invest). You will get much better returns investing in STI ETF, which is simple to understand. If you need a disciplined way to save, open a “Save as you earn” account, where it will deduct monthly contribution directly from your bank account. I am not a believer that you can excel in both protection and investment in one insurance policy.

Reposted from: http://www.bigfatpurse.com/2009/10/rule ... l-finance/

[Dennis Ng]

There are a few popular rule of thumb when it comes to managing money. I would say they do ensure you will be financially sound if you follow them.

Do not chalk up debt more than 35% of your income

Banks use 35% as your borrowing limit when approving your loan applications. This means that your monthly repayment towards any form of debt should be below 35% of your gross salary. The debts can be car installment, housing loans, outstanding credit card bills, etc. This rule is to protect you from taking too much debts. Breaking this rule will likely undermine your ability to save and you may find yourself paying debts for the rest of your life.

Save at least 10% of your income

As the parable from “The Richest Man In Babylon” says, “For each ten coins I put in, to spend but nine.” Always save at least 10% of your income. This is actually the very first step one should take to be well financially. The correct way to save is to pay yourself first. Always put aside 10% of your pay in another bank account (apart from the account that your salary credits into) immediately when you receive it. The account with the purpose to save should have minimal facilities, ie. without cheques, debit cards linking to it. This is to make it difficult for you to withdraw the money.

Do not commit more than 10% of your income into insurance

Do not under-insure but do not over-insure too! Many people treat whole life insurance as a form of savings. It is wrong! To me, insurance is a cost, it is not investment. One should not try to kill two birds with one stone. There isn’t anything is this world that sounds so good - you can have comprehensive protection while the same pool of money grows rapidly. Remember, buy what you need to protect as protection is a cost. It must be a needs driven requirement. Do not buy insurance to save (and invest). You will get much better returns investing in STI ETF, which is simple to understand. If you need a disciplined way to save, open a “Save as you earn” account, where it will deduct monthly contribution directly from your bank account. I am not a believer that you can excel in both protection and investment in one insurance policy.

Reposted from: http://www.bigfatpurse.com/2009/10/rule ... l-finance/

Well said. These are some Rules of Thumb I advocate as well.

However, currently, I save about over 60% of my income. As my income increases, I did not "upgrade" my lifestyle and expenses, thus, over the years, my saving ratio goes up from about 20% initially. (I used to save 20% of my income).

[AW]

Just to add a little to this thread esp since S'poreans seem to love their cars so much.

If you really need/want to buy that set of wheels and want it NOT to affect your wealth accumulation, the car should cost just 5% of your net worth.

Sadly it means every car owner out there has to be a millionaire and truth be told, yes. Yes, because few realise just how much a car's expenses will slowly but surely drag one's wealth accumulation dream. And think of it this way, once a car is so little of your net worth, what worries do you have about the costs? Just about none.

Personally I factor in the cost of buying high yielding assets to pay for my cars running expenses. So my cars mentally to me, "cost" much more than the purchase price. Once you meet that hurdle rate, go ahead and enjoy yourself. You earned it!

[Dennis Ng]

As some might know, I don't own a car. After not owning a car for so long, now that I have accumulated more than a million dollars and can easily afford one, the strange thing is I found that I no longer have any "zeal" for getting a car.

There are many inconveniences by having a car as well, car maintenance, where to park, fines etc, etc. The other day, the taxi I was in collided with a car in front, just before reaching my house. The taxi driver had to stay behind to settle with the other driver, while I just went home without a worry, after giving the taxi driver my contact number in case he needs me as eye witness.

I've personally seen people earning S$3,000 yet own a car. The car expenses alone took up over S$1,000 or half the person's take home pay. I wonder how this person going to ever reach Financial Freedom, if he/she continues such spending behaviour.

How "much stuff" do we really need? Most of us already have too much stuff. Spare a thought for the needy, it is a good practice to set aside some money every year for the less fortunate in our society.