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.
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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 (kbb.com), Edmunds.com, NADA.com and Cars.com.
Holiday gifts:
Spend no more than 1.5 percent of your gross income on the holidays, including gifts, decorations and travel.
Savings:
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.
Never:
•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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