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20 Best Financial Rules Of Thumb

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Maybe you don’t have the time (or patience) to study budgeting, investing, debt management, and other financial matters.

But you know you need to make at least a few right moves to be more financially secure.

What can you do? Learn a few simple financial rules of thumb, and apply them consistently.

Consider Harold, who my wife and I met at the Hot Well Dunes Recreation Area, in Arizona. He was there in a nice RV that he bought when he retired. He was a heavy equipment operator from the age of 18 until retirement — at age 42.

How did he retire so young? He explained that, when he first started working, a mentor told him to take a big chunk of every paycheck and invest it in mutual funds. Nothing more. That simple practice made it possible for Harold to retire decades earlier than normal.

A good rule of thumb, when applied consistently, cuts through the confusion and gives you a powerful and clear path to follow. Here are 20 of them to get you started…

1. Saving For The Future

The Rule: Save and invest at least 10% of your income.

The Explanation: A CNBC article says you’ll be a millionaire in ten years if you save and invest $6,000 per month. Okay, that’s a stretch for most of us, but you probably can invest 10% of what you make, which, over a longer timeframe will usually be enough for a nice retirement. For example, if you save and invest $458 per month, starting at age 27, by 67 you’ll have $1.4 million, according to Money magazine. Start earlier and even much smaller amounts will make you a millionaire.

2. Borrowing

The Rule: Never borrow for consumable or depreciating items.

The Explanation: Borrowing really only makes sense if it saves you money or makes you money, as when you borrow to buy a home (which saves you money if you buy right) or to invest or start a business. Any other borrowing just means you pay more for things. For example, a loan cost calculator shows you’ll pay thousands of dollars more for a car when you borrow for it versus paying cash. And that brings us to our next topic…

3. Credit Card Payments

The Rule: Pay credit card balances in full every month.

The Explanation: says the typical American will pay $279,000 in interest on credit purchases in a lifetime. Of course, if you pay no interest that money which would have gone toward interest can be saved and invested, and may amount to hundreds of thousands of dollars extra in retirement. So why not pay those credit cards in full every month and avoid all interest?

4. Coupons

The Rule: Clip coupons only when they actually save you money.. 

The Explanation: It sounds like an obvious rule, but it’s easy to violate it. For example, name brands are often more expensive than store brands even after a big coupon discount, so skip most name brand coupons. And if you discover that coupons save you only a couple bucks for an hour of effort, just work a few extra minutes per week and skip the clipping.

5. Reducing Expenses

The Rule: When reducing expenses, look first at large and regular expenses

The Explanation: Splurging on popcorn once in a while at the movies isn’t going to wreck your budget, but paying an extra $40 per month for utilities or an extra $4,000 for a car… those kind of mistakes really add up. Large purchases and regular purchases are the best places to focus your frugal efforts.

6. Your Paycheck 

The Rule: Do something to increase your work-related income every year.

The Explanation: Ask for a raise every year. If that fails, work an extra (overtime) shift here and there, or sell something to coworkers. See my list of ways to use a job to make money for more ideas, and do something to boost that work-related income every year. And if you go more than a couple years without that raise, start looking for a better job.

7. Cosigning Loans

The Rule: Never cosign a loan. 

The Explanation: According to The Atlantic 75% of people who need a cosigner default on the loan, and if you’re the cosigner, you’ll be the one paying. More than that, your credit may be damaged before you even know the borrower is in default. If you feel you must help, loan your money directly (the loss will be the same, but at least your credit score will be unaffected).

8. Buying Fresh Produce

The Rule: Buy small fruits and vegetables when they’re priced by the pound, and large ones when priced per piece.

The Explanation: You eat one banana at a time, right? So if you buy small ones you get more snacks for the same amount of money, since they’re typically priced by the pound. On the other hand, if you are charged by the tomato (or watermelon, or whatever), you want the big ones to maximize the value.

9. Emergency Savings

The Rule: Keep at least 12 months core expenses in readily-available emergency savings.

The Explanation: The experts argue about the amount you need (some say six months’ worth), but a job loss caused by a medical emergency, for example, can mean a long stretch without income, so having enough money to cover basic expenses (you can cut the non-essentials) for a year seems reasonable. A bank account or investments you can cash in without penalty (and within a week or so) are the best places to keep the money available.

10. Home Maintenance Planning

The Rule: Put aside 1% to 2% of your home’s value annually for maintenance.

The Explanation: Maintenance and surprise repairs are only a problem if you’re not prepared for them, and while you can’t predict the date on which your heater will die, you can predict that it will need repairs eventually. So why not plan for that and other home maintenance? The 1% rule is commonly suggested, but for older homes long-term repairs and maintenance can easily run 2% or more of the home’s value on an annualized basis.

11. Income And Expenses

The Rule: Aim for income equal to at least two times your core expenses.

The Explanation: The expenses you can’t avoid, like mortgage payments, utilities, insurance, property taxes, groceries, car expenses, and so on, are your “core expenses.” If half of your income covers those, the rest should be sufficient for your wants (as opposed to your needs) and for saving and investing. If your income is currently not twice (or more) what your basic expenses are, look for ways to either increase your income or decrease expenses.

12. How Quickly Your Investments Will Grow

The Rule: Divide your rate of return into 72 to get the number of years until you double your money.

The Explanation: You can read up on why the “rule of 72” works, but essentially it has to do with compounding (interest reinvested makes even more interest). It’s not exact (it depends on how often gains are reinvested), but it makes for a close approximation. So for example, if you’re averaging a 7% return in the stock market, your money should double in a little over 10 years.

13. Choosing A Job

The Rule: When comparing jobs, look at the true hourly wage.

The Explanation: There are other factors involved in choosing the right job, but to compare wages fairly you need to take into account into account job-related expenses (cost of commute, required tools), and the total time required from the time you leave the house. For more on this see my article on how to calculate your true hourly wage. Sometimes a job with a higher stated wage actually pays less when you account for total time and total job-related expenses.

14. Drawing On Your Retirement Funds

The Rule: You can safely withdraw 4% of your retirement money annually.

The Explanation: It’s assumed you’ll make more than 4% on your invested retirement funds, but you have to account for inflation too. The 4% rule allows for continued growth in the value of your invested money, which means you can take more out every year (even at the same 4% rate) to cover those rising prices.

15. Renting Or Buying

The Rule: When renting is substantially cheaper than owning a home, it’s best to rent. 

The Explanation: Assuming you can save money, it makes more sense to pay substantially  less for housing in the form of rent, and then invest the difference, versus throwing a big chunk of income at a mortgage payment. Besides putting you further ahead, this rule prevents you from buying a home just before real estate values drop (which is exactly when buying is typically much more expensive than renting). And when the time does come, be sure you’re ready to buy a home.

16. Buy Or Repair Appliances

The Rule: Generally, repair appliances when under 8 years old, buy new if it’s older than that. 

The Explanation: Consumers Reports says repairing an appliance does not always make sense. Older appliances reach a point where the repairs cost more than the residual value of the machine, and at that point — which varies, but is about 8 years for many appliances — replacing it with a new one makes more sense.

17. What To Do With Windfalls

The Rule: Invest most of every financial windfall.

The Explanation: You were surviving before you got that inheritance or extra-big tax refund, so you don’t need it to survive now. Celebrate windfalls with a little discretionary spending, but save most of the money (at least 80%), because in addition to unexpected good fortune, every life has unexpected (and expensive) misfortune. That windfall is an opportunity to be prepared!

18. Your 401k Contributions

The Rule: Always contribute the maximum that your employer matches in your 401k.

The Explanation: If your employer matches the first 6% of contributions to your 401k and you make $50,000 this year, by contributing $3,000 you’ll be given an additional $3,000. Why turn down free money? Even if you take your initial $3,000 out early and pay the $300 penalty (10%) you’ll be much further ahead.

19. Buy New Or Repair Your Car

The Rule: It’s almost always cheaper to repair than replace cars.

The Explanation: All the way up to 200,000 miles on the odometer it makes more sense to repair a car rather than replace it, according to Consumer Reports. That’s because new cars are expensive (to say the least), and because even used cars have large upfront purchase costs (title, plates, document fees, taxes, etc.).

20. Student Loans

The Rule: Borrow no more for education than your expected first-year salary.

The Explanation: As explained by, keeping total student debt to less than your first year salary makes it manageable, and possible to pay it off in less than ten years. If you borrow more than that not only will you be in debt longer, but your options will be more limited because you’ll need a job that can support your debt payments, which may not be the best job for you.

When To Break The Rules

Rules of thumb are simplistic, and may not always apply.

For example, if it costs $1,400 per month to buy and own a home, but only $800 to rent a nice place, the numbers say you’ll be better off renting and investing that $600 you save every month.

But if you really can’t save (maybe it’s just not in your nature), you might be better off buying that home just so you’ll have a form of forced savings (in the form of equity).

Or, in the case of paying off credit card balances, perhaps you have an offer for 0% interest for a year on your new card, and you trust yourself to save and invest the money needed for payoff, while you make the minimum payments — that would make more financial sense than paying off the balance..

So, if the underlying goal is more likely to be achieved some other way, break the rule. But when in doubt, follow these simple rules.

If you have your own financial rules of thumb that have helped you with your money situation, please share them below … and keep on frugaling!

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