RISMEDIA, May 10, 2010—(MCT)—Money rules of thumb can be inaccurate because people’s financial lives differ so much. But they can help us make difficult decisions or give us benchmarks. Here are a few:
-Rule of 10: For perspective on big purchases, think about how you will feel about it in 10 days, 10 weeks and 10 years. For a luxury car: In 10 days, you’lI still be excited about the new-car smell and its nice ride. In 10 weeks, it’s just the machine you use to get to work and the supermarket. In 10 years, you’ll barely remember this car.
-House payment: Your mortgage, including taxes and insurance, should not exceed 29% of your gross monthly income.
-Car payment: All vehicle payments should not exceed 15% of your take-home pay.
-Total debt: Total monthly debt payments should not exceed 36% of your gross monthly income.
-Car repair: If the auto repair costs less than half of the trade-in value, repair it. Otherwise, considering selling it and buying another.
-Holiday gifts: Spend no more than 1.5% of your gross income on the holidays, including gifts and travel.
-Savings: Save 10% of your take-home pay. Some would say that should be on top of retirement savings.
-Kids’ allowance: Give $1 weekly per grade in school.
-Life insurance: Buy a policy worth six to 10 times your gross annual income.
-Restaurant tipping: To quickly figure a generous tip, double the first digit on your bill. For bills more than $100, double the first two digits.
-Emergency fund: Keep a rainy-day fund equal to three to six months of expenses.
-Debt payment: Pay debts from highest interest rate to lowest. Or from the smallest amount to largest.
-Mutual funds: Be wary of funds with an expense ratio of more than 1%.
-College borrowing: Don’t borrow more money than you’ll make in your first year working after graduation.
-Asset allocation: That’s how you should split your long-term investing between stocks and bonds. A conservative rule of thumb is 100 minus your age goes in stocks; the rest in bonds. More aggressive is a stock allocation of 110 minus your age.
-Organic produce: If it has a thin skin that you eat, such as apples, spend extra for organic. If it has a thick skin that’s discarded—say, bananas—save your money. It’s about exterior pesticide residue.
-Choose experiences: In a choice between spending on things or experiences with other people, choose the latter. Research shows it makes us happier.
Never:
-Carry a credit card balance.
-Lend money to friends and family.
-Borrow from your 401k or cash out early.
-Pay fees on a checking account.
-Buy an extended warranty.
-Buy an investment you don’t understand.
(c) 2010, The Morning Call (Allentown, Pa.)
Distributed by McClatchy-Tribune Information Services.
