How to Manage Your Money Effectively - Learning Tips 5 and 6

As we continue to venture into ways to manage money effectively, here are tips number 5 and 6 - about the mortgage loan and your investment portfolio.

 

How to Manage Your Money Effectively - on Mortgage and Investment Portfolio

 

Tip Number 5 - Your home loan repayments should not exceed one third of your monthly income.


While most banks set the cut-off line at one-third of your monthly income, the point to note here is that you do not have to stretch your loan instalments. Ideally, stay at 20% or 25%. Otherwise, you risk having all your savings channelled into your own house, which doesn't generate income.


When you earn $3,000 a month, it is okay to spend $1,000 (one-third) on your mortgage. But when your income grows and you upgrade to a too-expensive or big a house [based on this one-third rule], most of your income will go towards the house, and less into investment and savings. All your combined loan repayments, including your home, car and personal loans, should not be more than 40%. When you are paying 50% of your income towards loans, it is very dicey. Your life will be stressful and you cannot afford to fall sick.
 

Tip Number 6 - The percentage your portfolio to be invested in equity should be 100 minus your age.


The logic behind this rule is that as you get older, you should not take on too much risk. So, over the years, you should lower your risk and exposure to equity. Since equity investment is deemed high risk, this rule assumes that when you are young, you should take on more risk since having a longer time frame allows you to ride through rough patches. For instance, if you are 25, you should invest 75% of your portfolio in equities. In contrast, when you turn 75, you should lower this percentage considerably to 25%.


But financial experts point out that this rule is too simplistic. Your investment should also take into account your objectives, risk tolerance and investment time line. Prior to building your portfolio of investments, you also need to consider other important factors that will eventually guide you in your choice of investment.
 

The first step to identifying what type of investments to participate in is to consider your investment goals, and to determine what you intend to achieve in the short term and long term. For example, do you plan to buy a house during the next one or two years? Or are you planning for retirement in the next 10 years? One should also think about rainy days and ensure that some portions of one's investments are liquid or redeemable.


The second step is to assess your attitude towards risks. Are you averse to risk or keen on taking risks in return for fruitful investments? By determining your risk appetite, you will be able to choose which investment tool best suits your risk profile.
 

Conclusion

 

Managing money can be as easy and complicated as you want it to be. If you want to go deep into it, it can get very complicated and can drown you. Just for investment alone, you would need to consider 20 to 30 factors, such as the history of your investment, the fund manager, the investment company, your rate of returns and so on.

 

Having a general guideline is better than having none. The rules apply to 70% to 80% of people. But if your lifestyle or values happen to be outside the norm, then the rules will not be applicable to you. If you want something more accurate, you would need to tailor-make it.
 

People have different perceptions and priorities. Financial planning is a process. In life, the only certain thing is change and every stage of life is different. So, as you go along, you would need to readjust.

 

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