Money Rules of Thumb

MSN lists 16 money rules of thumb. I've never heard of many of them -- though it's not clear whether or not the author is saying these are just hers or are ones we all should know. Either way, I wanted to share a few of my favorites with all of you and give some additional thoughts as well. Here goes:

Retirement: "Save 10% for basics, 15% for comfort, 20% to escape." This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you won't be eating pet food. Fifteen percent should get you a more comfortable living, while 20% gives you a shot at an early retirement (and yes, you get to count employer contributions as part of your percentage). Wait just a decade to start, though, and you'll need 15% for basics and 20% for comfort; an early retirement may not be in the cards.

I don't know many people who are saving 10% and 20% seems almost unrealistic for many. That said, we save about 30% of our living expenses per year (our expenses are far below our income.) Applying the guideline above, if we keep this up and maintain our standard-of-living (don't expand it), we should be able to retire early.

Also note the importance of the power of compounding in this rule.

Student loans: "Your total borrowing shouldn't exceed what you expect to make your first year out of school."

This is ok for a general rule as it attempts to tie costs with expected income. This is exactly what I recommended in How to Get the Most Financially Out of College.

Credit cards: "If you carry a balance, look for the lowest rate. If you don't, get rewards at least equal to 1.5% of what you spend."

You can (and should) do much better than 1.5% back. If you like cash back (and who doesn't like cash?), you can get 2.6% cash back by combining the Blue Cash from American Express card and the Chase Freedom Cash Visa Card.

And I don't have to say what I think of carrying a balance, do I? ;-)

Financial flexibility: "You need to be able to get your hands on cash or credit equal to three months' worth of expenses."

As she notes, cash is better but not everyone's there at this point in their lives (though they should be working towards it.)

Insurance: "Cover yourself for catastrophic expenses, not the stuff you can cover out of pocket."

Yes, yes, yes! This is why we have high deductibles. We wouldn't make a claim unless it was a substantial expense, so why pay extra for a low deductible? Note: we also have adjusted our emergency fund up a bit to be able to cover a big outlay in case we need to come up with a high deductible payment.

Life insurance: "Those who need it typically need five to 10 times their income."

Good enough for a rule of thumb, though I'd prefer to see "their living expenses" replace "their income." Though most people probably live in a world where living expenses equal income, so what's the difference?

The piece also offers some thoughts on having a mortgage, but I prefer my formula for buying a house.

What's your take on these money rules of thumb?

Comments

[Pat]

I currently save 26% of my income for retirement. And I am not counting my employer's contributions even though the article said that was okay.
I didn't start out that way but every time I change jobs or get a raise, I put ALL of the new money towards my retirement accounts. I have been living on nearly the same amount for almost ten years now. Of course when I first started saving, I didn't use coupons, didn't shop for bargains and I didn't read blogs like this. These things have helped me to maintain my outflow at nearly the same amount give or take a little. As a matter of fact, I just recently got the Chase Freedom card because of this very blog!

[Traciatim]

Wow, I feel dirty compared to Pat. I'm only saving 12% of my income for retirement . . . that should be way more.

I liked the advice that if you can't afford the house on a 30 year fixed mortgage you can't afford it. In Canada the general 'run of the mill' mortgage is 25 years and I had the same rule.

Cars in 4, homes in 25 (30 USA). If you can't afford that you can't afford what your buying. I hope that the S.O. agrees with the same rules over our lives. If I can get up to 18% of my income in the retirement plan, and some more in the 'fun investing' plan (say 5%) I think I'll turn out just fine.

[Tim]

right now, we save about 90% of our income. i don't think 10% is gonna get you there even if you start in your early 30s.

i like citi dividend platinum, b/c you get standard 1%, plus if you buy stuff from the participating stores, you can get much more back. living overseas, we buy tons from amazon, so chase amazon works for us.

[Mark]

Wow Tim, you save 90% of your income and still have some left over to "buy tons from amazon"??????

Including my company match and pension contributions I will be saving 21% toward my retirement when I start a new job in a few weeks. I am only 27, so according to this I should be pretty comfortable in retirement.

[Fred333]

Great post. Those are some great rules to follow.

[RB]

It's hard to take an article seriously when it makes this patently false statement:

"[Y]ou'll avoid the 20% or so loss to depreciation that happens as soon as you drive a new car off the lot."

That popular myth has been proven to be just that: http://www.foxbusiness.com/article/driving-lemon-myth-lot-290898.html