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.
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{ 4 comments… read them below or add one }
Currently I’m running my business for 3 years already. I have renovation loan of about SGD$21k with credit card instalment of about $4k from furniture and kitchen appliances and medisave arrears of about $5k. I am always in constant headache of balancing reinvesting the revenue earn from my business back into business to create more clients and expanding to paying back my debt to the banks and goverment.
What would be your advise? Thanks
David
B.Regards
Currently I’m running my business for 3 years already. I have renovation loan of about SGD$21k with credit card instalment of about $4k from furniture and kitchen appliances and medisave arrears of about $5k. I am always in constant headache of balancing reinvesting the revenue earn from my business back into business to create more clients and expanding to paying back my debt to the banks and goverment.
What would be your advise? Thanks
David
B.Regards
It is unfair to comment based on brief overview of your situation, but I’ll try to put myself in your shoes. Business takes at least 3-5 years to break even on the average. It can even take longer. For me, I will weigh between business profits and cost of debts. For e.g., how much more can I earn by reinvesting into my business? If I can only increase profits by 10% yearly, I might be better off paying my credit card debt which charges 24% interest per annum. However, if I am confident to increase my business profits 300%, it makes sense for me to reinvest in my business and possibly refinance my highest interest incurring debts. But businesses have risk, there is no such things as I am 100% sure it will increase by this much if I reinvest. The probability of success is low but the reward is high. The safer method of course is to pay off the highest interest bearing debts first.
It is unfair to comment based on brief overview of your situation, but I’ll try to put myself in your shoes. Business takes at least 3-5 years to break even on the average. It can even take longer. For me, I will weigh between business profits and cost of debts. For e.g., how much more can I earn by reinvesting into my business? If I can only increase profits by 10% yearly, I might be better off paying my credit card debt which charges 24% interest per annum. However, if I am confident to increase my business profits 300%, it makes sense for me to reinvest in my business and possibly refinance my highest interest incurring debts. But businesses have risk, there is no such things as I am 100% sure it will increase by this much if I reinvest. The probability of success is low but the reward is high. The safer method of course is to pay off the highest interest bearing debts first.