December 04, 2011

Money rules of thumb

In less than a month, it's a new year and as early as now I'm thinking of resolutions and my goals that I want to achieve which are related to what I read in Chicago Tribune. It was an old article of Mr. Gregory Karp under Money & Real Estate which I decided to post it here to remind me and help me make some difficult decisions if the needs arise.
Money rules of thumb can be inaccurate because people's financial lives differ so much. But they can help us make difficult decisions or give us benchmarks. Here are a few:

Rule of 10:
For perspective on big purchases, think about how you will feel about it in 10 days, 10 weeks and 10 years. For a luxury car: In 10 days, I'll still be excited about the new-car smell and its nice ride. In 10 weeks, it's just the machine I use to get to work and the supermarket. In 10 years, I'll barely remember this car.
House payment:
Your mortgage, including taxes and insurance, should not exceed 29 percent of your gross monthly income.
Car payment:
All vehicle payments should not exceed 15 percent of your take-home pay.
New cars for millionaires:
Never buy a new car until you're a millionaire. Buy used because the depreciation is too large on a new vehicle. A corollary: Buy the cheapest car your ego can afford.
Total debt:
Total monthly debt payments should not exceed 36 percent of your gross monthly income.
Day-per-hundred rule:
For a pricey discretionary item, give yourself time to cool off. Wait one day for every $100 the thing costs. If you still want it at the end of that time, consider buying it.
Car repair:
If the auto repair costs less than half of the trade-in value, repair it. Otherwise, considering selling it and buying another. Find trade-in values at Kelley Blue Book (,, and
Holiday gifts:
Spend no more than 1.5 percent of your gross income on the holidays, including gifts, decorations and travel.
Save 10 percent of your take-home pay. Some would say that should be on top of retirement savings.
Kids allowance:
Give $1 weekly per grade in school. A fourth-grader gets $4.
Life insurance:
Buy a policy worth six to 10 times your gross annual income.
Restaurant tipping:
To quickly figure a generous tip, double the first digit on your bill. A $43 bill gets an $8 tip. For bills more than $100, double the first two digits. A $135 bill gets a $26 tip.
Emergency fund:
Keep a rainy-day fund equal to three to six months of expenses.
Net worth:
Net worth is all you own minus all you owe, or what's left if you sold everything and paid all your debts. If you aim to be a "wealth accumulator," your net worth should equal your age times your gross income divided by 10, according to the book "The Millionaire Next Door."
One percent rewards:
If you have a good credit rating and don't carry over a balance from month to month, search for a rewards credit card that gives more than 1 percent cash back.
Debt payment:
Pay debts from highest interest rate to lowest. Or from the smallest amount to largest.
Mutual funds:
Be wary of mutual funds with an expense ratio of more than 1 percent.
College borrowing:
Don't borrow more money than you'll make in your first year working after graduation.
Asset allocation:
That's how you should split your long-term investing, such as for retirement, between stocks and bonds. A conservative rule of thumb is 100 minus your age goes in stocks; the rest in bonds. More aggressive is a stock allocation of 110 minus your age.
Organic produce:
If it has a thin skin that you eat, such as apples and grapes, spend extra for organic. If it has a thick skin that's discarded, say bananas and corn, save your money. It's about pesticide residue on the exterior.
Choose experiences:
Faced with a choice between spending on things or experiences with other people, choose the latter. Research shows it makes us happier.
•Carry a credit card balance.
•Lend money to friends and family.
•Borrow from your 401(k) or cash out early.
•Pay fees on a checking account.
•Buy an extended warranty.
•Buy an investment you don't understand.
A rule-of-thumb philosophy often attributed to American philosopher Bill Earle: "If your outgo exceeds your income, then your upkeep will be your downfall.

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