20 Financial Rules of Thumb You Should Know About

A rule of thumb is a general guideline which people follow to get a quick estimate of the value they are looking for. It is used for quick estimates and is not based on specifics of a case. These rules are not absolutely accurate and are only meant for reference in that moment. There are so many rules of thumb related to finances around that it is difficult to decide which ones are actually worth it. Some people dismiss these rules altogether because they favor deep thought and long decision making processes when it comes to their finances. Nonetheless, some rules of thumb can be very useful when looking for quick estimates and can be very convenient. Here is a list of 20 financial rules of thumb which are actually useful in everyday circumstances.

  1. Save at least 10% of your income – 10% of your income will prove to be a very basic kind of saving. You can save 15% for comfort, and increase it to 20% for big decisions in the future.
  2. Do not invest more than 1% of your total savings in your employer’s stocks – investing all your money in just one place is a risky decision at best. It is better to diversify your investments.
  3. Tackle big expenses first – if you are receiving a profit of 1% on your car purchase, it will definitely be of more value than the 10% you save on groceries.
  4. Your mortgage should be less than twice your total income – if you want to successfully pay off your mortgage, you should follow this rule. So, if your income is 150,000 dollars per annum, your mortgage should be 300,000 dollars or less.
  5. Your housing costs should be less than 28% of your gross income
  6. Your monthly debts should be less than 36% of your gross income
  7. Refinance your home when interest rates have dropped by 1%
  8. Buy a used car or use a new car for ten years – a new car is way more expensive and going with either of the two approaches will save you a lot of money. If you can use your used car for ten years, you will save even more.
  9. The 20 – 4 – 10 rule for buying cars – the 20 – 4 – 10 rule for car purchase is a simple and straightforward rule in which you use 20% of the total cost as down payment, finance your car for no more than 4 years, and ensure that you do not spend more than 10% of your income on it.
  10. Approximate your new vehicle’s 5 year cost of ownership buy doubling the price and dividing it by 60 – calculate the 5 year cost (on a monthly basis) for the new car you want to purchase and ask yourself if it is a feasible investment for you.
  11. Save for retirement before your children’s education – retirement savings should be a priority because children can take student loans in future but there are no loans for retirees. Therefore, do not compromise on your retirement funds or it is a possibility that you find yourself homeless after you retire.
  12. Save approximately 20 times your gross annual income for your retirement – this means if you earn 60,000 dollars every year, you will need 1,200,000 dollars for your retirement.
  13. Your retirement needs should be 100% of your pre retirement needs plus an added 10% – a different way to think about your retirement funds. If you earn 60,000 dollars every year, you will need 60,000 dollars every year after retirement as well and an added 10% for safety and security.
  14. Carry a credit card with low interest rate – and if yours offers very high interest rates, switch to a new one.
  15. Use 1% of windfall money and save the rest – in case you receive windfall money, don’t spend it all on yourself. Make sure you spend 1% (or 2% maximum) and save the rest of it.
  16. Save emergency funds first, clear your high interest debt second, begin investing third – saving funds for emergencies should be your top priority. Then, you should clear your high interest debts. Finally, you should clear your low interest debts and simultaneously start investing in diverse areas.
  17. Don’t buy something with your credit card if you can’t buy it using cash – this is an approach we all should follow. If you see an item and feel hesitant to purchase it via cash, you should definitely not take your card out for it. Not only will you find yourself in a debt that will be difficult to pay back, you will also waste money which you could have saved.
  18. Always take the employer match on 401k – this is a thumb rule you should always follow.
  19. Don’t try to evade taxes – if you try to evade taxes and mess with IRS, it will only backfire. Always pay what is due. It is logical to ask for deductions which are valid but trying to pay less than what you should is not going to help you.
  20. The rule of 72 – to find out how long it will take for your investment to double, divide 72 by annual return. So, if your annual return is 5%, it will take 14.4 years for your investment to double.

You should not use these rules to base big transactions but just for an immediate estimate for that time. They prove to be helpful when developing a plan since you know which direction you need to turn in for a successful and profitable decision. One of the unknowns when it comes to personal finances is the money you have available which you may not be aware. Selling your structured settlement can give you the cash you need right now.