5 Financial Rules to Put You on the Right Track

andresr050700039.jpgEveryone has a unique situation, and there are no concrete financial numbers that define success, but there are some rules of thumb that can help you gauge your progress. While following these rules won’t guarantee success, they will put you on the right track.

Keep in mind, these rules represent guidelines, not gospel. Life doesn’t always stay inside the lines, and what may work for some may not work for you. Nevertheless, these are worth aiming at if you’re ready for some target practice and want to build a serious financial cushion.

How much Debt should I have?

Ideally, no debt would be the best answer, but you have to realize that for some assets it is almost required you borrow money, such as buying a house. If you have taken more debt than you can handle, don’t be discouraged. It doesn’t matter how much money you make. If you can’t live within your means, you become a slave to your creditors. Most experts agree that your total monthly debt payments shouldn’t exceed one third of your gross monthly income.

How Much Worth House Can I Buy?

So how much should you spend on a house? The traditional way to calculate that is to add up all your income and make sure that your housing expenses — mortgage payment, homeowners insurance and property taxes — don’t exceed a certain amount of that total. The traditional limit, still used by many lenders, is 28% to 32% of gross monthly income. For example, if you and your spouse together earn $100,000 per year, you shouldn’t spend more than $250,000 on a home.

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How Much Money Should I Save?

One of the most widely used rules for saving is that you should save at least 10% of your income. Keep in mind; this is typically assuming you are saving additional money into a retirement plan as well. This 10% rule applies to creating a savings cushion for unexpected expenses, a college education, or other goals.

How Much Should I Have In My Emergency Fund?

An emergency fund is used to cover expenses when there is a sudden loss of income or other financial emergency. Most experts suggest a household have between three and six months worth of expenses available in the event of an emergency. So, if your monthly obligations total $2,000, you should try and keep between $6000 and $12,000 in your emergency fund.

How Much Money Will I Need in Retirement?

More than you think. “A lot of people don’t have very good information about what their expenses will be during retirement,”
So, just how much will you need to live on during retirement? Many experts use the assumption that people will need 70% of their pre-retirement income each year after they retire: if your annual income is $100,000 today, you should figure you will need $70,000 after retirement.

But if you look at what people want to do when they retire, most say they’d like to spend about the same amount of money as they did before retirement. Maybe they won’t need to pay to park downtown or spend as much on clothes as they did when they were working, but maybe they’ll decide to travel or take up expensive hobbies like golf. My suggestion, which I know will depress people, is to assume that you’ll need a 100% replacement rate.

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7 Responses

  1. Mike says:

    good post. Learn from my mistakes. I am deeply in debt due to college and giving my kids cars and such. Keep in mind inflation costs also when buying a home.

  2. There’s good debts and bad debts. I’m OK if its good debts. My definition of good debts is the interests that I pay to the bank/whoever I own is less than the payment I get.

  3. All sound advice, for sure.

    At one time, I was putting away over a third of my income into a combined pension and investment plan.

    However, circumstances beyond my control all but destroyed what I’d invested and saved.

    On the plus side, the pension is still there and I’m contributing once more…

  4. Good website, and good article. I think that we need to be proactive to move ahead and build a life, so sometimes temporary debt is necessary. However, a strong game plan is necessary. Otherwise I try to stay OUT of debt as much as possible. Regards. KCJ

  5. aksn1p3r says:

    being unemployed and debt-free is much more bearable as compared to unemployed and “knee-high”,as they say, in debt.

    when i start working, im gonna save up and cut costs so much that i wanna be a millionaire, even if i dont get there, it will still be worth it.

  6. Friend4all says:

    Hello,
    Your blog on finance is very nice. You are providing very use full information for finance.

  7. Eric Bridge says:

    Wow! what an idea!. Amazing. Man who stand behind car get exhausted.

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