Nine Handy Rules of Thumb for Money
- 2010 6 Oct
I love "rules of thumb," little guidelines that are easy to remember and fall somewhere between mathematical formulas and shots in the dark. Here, for your enjoyment and possible edification are some of my favorite rules of thumb for money. I've collected them over the years.
Measurement: A U.S. dollar bill is exactly six-inches wide. This comes in handy if you need to measure something accurately, and you don't have a tape measure. Two widths equal a foot exactly. A dollar bill folded in half becomes exactly three-inches wide.
Insurance: Insure your possessions for catastrophic events, not situations you can cover out of pocket. This rule will keep your insurance costs down because you will be accepting higher deductibles and higher limits. That way, you agree that you will be responsible for covering some of your own losses.
Mortgage: If you cannot afford a 30-year fixed rate mortgage and a 20-percent down payment, you can't afford to buy the house. I think we've learned the lessons of nothing-down, interest-only, adjustable-rate and other creative mortgages. For now, it seems, creative home lending has all but disappeared. Should it creep back, don't forget this rule.
Retirement: Save for retirement first, college second. Secure your own retirement before paying for your kids to go to college. This, sounds harsh perhaps, but it is a rule you should embrace. The best gift you'll ever give your kids is assurance that you will not become a financial burden to them in your sunset years. They will have more options for how to pay for college than you'll have for how to survive once you stop working.
Total debt: Total monthly debt payments should not exceed 36 percent of your gross monthly income.Add up your mortgage payment, car payments, credit-card payments and student loan payments. Now divide that total by your monthly income to learn what percentage of your money goes toward your debt.
Car repair: If the auto repair costs less than half of the trade-in value, repair the car. Otherwise, considering selling it and buying another.
Holiday gifts: Spend no more than 1.5 percent of your gross income on the holidays, including gifts and travel. And please, make sure that 1.5 percent is cash, not credit.
Emergency fund: Keep a rainy-day fund equal to three to six months of expenses. This should be cash that you keep available and safe, not your retirement account, which is not available to you now.
College borrowing: Don't borrow more money than you'll make in your first year working after graduation. Pay attention to this one. If you are going to become a school teacher with an entry salary of $45,000 a year, do not borrow more than $45,000 total during your entire three to five years in college. Borrow less, if at all possible.
What's your favorite money rule of thumb? Can you defend it? Head on over to Mary's blog to tell us about it:MoneyRulesDebtStinks.com.
October 6, 2010
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