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General Thumb Rules of Money Management


Following are broad, easy to understand general money thumb rules you could use as a starting point for assessing what to do in your own financial situation. This are not universal laws, so applicability may vary from person, place & situation.

Savings - As a rule of thumb you should be saving at least 10% of your annual income. The earlier you start saving, more time your money would have to grow with the help of power of compounding. Early you start saving, the early you would be able to retire.

Emergency Fund
- Keep six months of your gross monthly expenses in savings account for emergencies. If you have a single source of income or have more dependents you may need to keep more in emergency fund.

Retirement Fund - You should have retirement capital fund which is 20-25 times the annual income you would need at retirement in future. Also take into account your lifestyle & inflation.

Home Finance - Spend no more than 2.5 times your gross income on a home. Come up with at least 20% of down payment.

Stocks Portfolio - Subtract your age from 100 for percentage of your savings that should be in stocks. If you're investing for the long-term(10 years+), stocks are the place to be. As you get older, you should gradually move money out of stocks and into fixed income debt. Invest no more than 10% of your portfolio in single stock.

Life Insurance
- You need life insurance that can replace at least 5 times of your annual income. This way surviving family members would have enough time & money to adjust financially. Also stay at home spouse (usually wife) should also have life insurance, as they are home maker, the same services cost money if done by others in there absence.

Shopping
- Resist the urge to buy latest gadgets mobiles,cameras,audio-video system,cars/bikes or any consumer good which is not a need and only a want. Most of this goods cost most when launched. Wait for 6-12 months, you are mostly likely to get it substantially cheaper, the product would still serve your need for next many years.