12 Money Rules You Can Live By
Supposedly generic financial advice intended for everyone doesn’t work. All of us are unique like snowflakes, so we need to have financial rules that are tailored to our individual situations to help guide us.
Except that it turns out that it can be very helpful to have rules of thumb to follow.
For example, a study involving West Point cadets found that teaching them rules of thumb was just as effective at least as regular personal finance training when it came to increasing their confidence and knowledge of money in addition to them being willing to take financial risk. It was found by researchers that actually rules of thumb for money were more effective compared to teaching Dominican Republic small business owners accounting principles.
All of us lead very busy lives – so we just would like to have an answer sometimes. If you tired of approaches to financial advice that tell you on the one hand to do this, but on the other hand try that, then check out the following guidelines that I have been collecting over the years. You might find that some of these one-size-fits-all tips might suit you very well.
1. Buying a car: Buy a used vehicle and keep it for 10 years
Although new cars are great, they are very expensive and lose a great deal of their value during their initial two years. Let somebody else pay for all that depreciation and capitalize on the fact that the better-built cars of today tend to run very well for a decade at least if they are maintained properly. This will allow you to save thousands of dollars over the course of your driving lifetime.
2. Car Loans: Use the 20/4/10 rule if you must borrow money to buy a car
You ideally wouldn’t borrow money in order to purchase an asset that is going to lose value, however, you might not always have the ability to pay cash for your car. If you are unable to do this, to prevent yourself from overspending put 20% down on your car, limit your loan to only four years and make sure that your monthly payment isn’t higher than 10% of what your gross income is. A large down payment will prevent you from being “underwater,” which refers to owing more on your car than what it is actually worth, immediately after driving it off of the lot. When you limit how long your loan is for it will you build up equity more quickly and reduce how much overall interest you have to pay. Lastly, when you cap how large your payment will be it, it will help to prevent your car payment from eating too much into your monthly budget.
3. Save for college
It is very important to save for retirement, but immediately after your child is born you should get into the habit of saving at least $25 a month for college. It is always possible for your children to get student loans. However, nobody will loan you money for your retirement. Your kids aren’t gong to thank you if having to pay for their college education means you have to move into their house because you are broke and 70. Fortunately, making even small contributions into a 529 college savings plan over time can really add up. Joe Hurley, who founded SavingForCollege.com says that if you start early it can mean the difference between having to choose between a college that offers the most financial aid as opposed to the one that is best for your child.
4. Credit cards
Search for a low-rate credit card if you are carrying a balance in order to help you get your debt paid off. If you pay your bill in full every month (the way you should do), then look for a rewards card that will return to you 1.5% at least of whatever you spend. However, if credit card debt is dragging you down, don’t mess around with rewards cards. Instead, focus your efforts on getting a low-rate card and paying off your debts quickly. However, if you do pay your bill in full, review your rewards program regularly to ensure you are getting maximum value from them. These programs do change at times, or the way you utilize your rewards or spend your money can also change. Steve McQuay, a credit card expert at NerdWallet says that even if you don’t want to have manage a complex wallet or play the game, you shouldn’t ever earn less than 1.% 5 back on all of the purchases you make.
5. Emergency savings
It’s important that you can get hands on credit or cash that is the equivalent of at least three months of expenses. That classic advice on emergency funds – that you need to have saved three to six months worth of expenses – is sound advice. However, it could take you several years to save this much and you also have other priorities that are just or even more important (like retirement, for example). As you are building up your cash, be sure to have a Plan B also. That might be having cash in a Roth IRA (you are able to pull your contributions out any time without having to pay any penalties or taxes), have a home equity line of credit available, or room on your credit cards.
Make sure you are covered for catastrophic expense, instead of the kinds of things that can be paid out of pocket. When it comes to insurance, it should provide you with protection against major things – those unexpected expenses that potentially could financially wipe you out, like a car accident where a lawsuit is trigger or your house burning down. On your policies you want to have high deductibles as well as high limits. It doesn’t make a lot of financial sense over the long run to make a number of small claims. Amy Danise, an insurance expert with NerdWallet, says that you could obtain some smaller insurance payments that way, but you are risking have your rates increased which could cancel those gains out and more.
7. Mortgage amount
If you are unable to afford the payments on a fixed-rate 30-year mortgage, then you really can’t afford that house. There may be another way of saving money through using a different type of mortgage, like a hybrid loan where a lower initial rate is offered. However, if you use an alternative loan due to it being the only way way of being able to purchase the house you really want, then your sights might be set too high. A mortgage that busts your budget places you at risk of ending up in even-deeper debt, particularly when all of the other costs associated with home ownership are considered.
8. Mortgage rates
The interest rate on your mortgage should be fixed for as long as you are planning on begin in your home at least. Obviously plans can change. However, you don’t want to be forced from your home due to a large payment increase when you were planning on living there for many years. If you are fairly certain you are going to move in five years, then getting a five-year hybrid might be a good option for you. However,if you are thinking you will be staying in your house for at least 10 years, then thinking about going with the certainty that a 30-year fixed rate brings you.
9. Mortgage prepayments
There are better things that can be done with your money than prepaying a low-rate mortgage that is also potentially tax-deductible. It sounds great to save money on the interest you have to pay and reducing the number of years on your mortgage. However, before you think about making extra payments in order to reduce the principal on your mortgage, be sure all of your other important priorities have been covered first. For one thing, you need to save enough money for retirement, and all other debt needs to be paid off, given that a majority of other loans will have a higher interest rate than a mortgage and it won’t be tax deductible. In addition, you should have an emergency fund and be adequately insured as well. Once all these bases have been covered, you can then start paying down your mortgage if you want to.
10. Retirement: Save 15%
You might need to save even more if you would like to retire early or got started late. Take out your retirement plan and run the numbers on it. For a majority of people, a good starting point is 15%,which includes any company match. Even if you are unable to save as much as you’d like to, just start with as much as you can and then increase your rate of savings on a regular basis. Your top financial priority should be your retirement. There is no way to get back those lost years of your money earning tax-deferred returns, all the lost tax breaks or lost company matches.
11. Retirement, Part 2
Leave your retirement money in for your retirement. If you have a small retirement fund, you might be tempted to spend it and think that it won’t really matter. However, it does. Penalties and taxes will cost you 25% at least and probably more of whatever you take out. In addition, for every $1 taken out, it will cost you $10-$20 in future lost retirement income. After your retirement fund has grown larger, it might be easy convincing yourself that you have good reasons for withdrawing or borrowing the money. However, there actually aren’t. Leave your money alone so it will be there when you really need it after you retire.
12. Student loans
The total amount that you borrow shouldn’t be more than what you are expecting to earn during the first year after you graduate. At the current interest rates, that will help to ensure you will be able to pay off whatever you owe in 10 years and your payments kept under 10% of your total income. According to Mark Kantrowitz, a financial aid expert and author, that is considered to be an affordable repayment rate. There are still options for you if you didn’t limit how much you borrowed and currently struggling. Brianna McGurran, a student loan expert with NerdWallet, says that if your federal loan balance is overwhelming, that there are income-driven repayment plans available. You might be ashamed of your debt or be tempted to hide it, however it is better to look at what your repayment options are to get some relief.