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Words of Wisdom : "There are only two lasting bequests we can give our children... one is roots, the other wings." ~ Steven Covey

10 Money Rules of Thumb you Must know

Yesterday, I had blogged about the Rule of 72, which is a rule of thumb to quickly compute, in how many years your money would double, in a particular investment. 

Given the busy lives that we all lead, these rules of thumb are a great tool to save time and yet make the right financial decisions. So let me share a list of 10 such key short-cuts. These are the concepts that can easily be learnt and applied in our day-to-day money matters.

1. Depending on your job stability and financial position, you should keep aside an amount equivalent to around 3 to 6 months' of your monthly expenses as an Emergency Corpus.

2. If you have a home-loan, the total of all your EMIs put together should not exceed 45-50% of your monthly take home pay. If you have education / vehicle loan, your outflow on EMIs should not go beyond 25-30%. But if you are servicing only the personal loans and credit card outstanding, this limit is strictly 10-15%.

3. At the bare minimum, 10-15% of your monthly income should be invested for crucial long term requirements such as children's education and your retirement. The actual savings would, of course, depend on the specifics of your case.

4. Your investment in equity should be equal to 100 minus your age; with the balance in debt products.

5. Re-balance your equity-debt portfolio when there is a 5% deviation from the ideal ratio that suits your financial profile

6. Your life insurance cover should be around 6 to 10 times your annual income. (And as has been often advised, Term Policy is the cheapest and simplest way to do so.)

7. Your vehicle loan tenure should not be more than 3-5 years.

8. You may need a retirement corpus of at least around 100 times your current annual expenses to maintain the same standard of living. 

9.  First insure, then invest and finally what remains should be spent.

10. Rule of 72

Caution: As per the definition, a rule of thumb is a principle with broad application but is not strictly accurate or reliable for every situation. Therefore, be careful about how you apply these rules of thumb. They may sometimes yield a wrong answer. For example, just because your age is 30, doesn't necessarily mean that you can invest 70% money in equity. Maybe you have a requirement for a house in next 1-2 years. In that case taking such a high exposure to equity would surely be a bad idea.

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