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Sometimes, you just want an answer.
"Can I afford a new car?" "How much should I be saving for retirement?" "What's the best way to pay off debt?" "What's the right credit card for me?"
If you're a patient, detail-oriented type, you may be willing to sit still for an exhaustive lecture on any of the above subjects. If you're like most of us -- overworked, sleep-deprived and in a hurry -- you'd rather skip the whole dreary "on the one hand this, on the other that" analysis.
So I've cut to the chase and compiled a list of my 16 favorite money rules of thumb.
These are, of course, just guidelines. By definition, rules of thumb aren't meant to be immutable laws or applicable in every situation. But hopefully these broad, easy-to-understand principals will at least give you a starting point for assessing what to do in your own financial situation.
Retirement, Part I: "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. For a more customized estimate of how much you need to save, check out MSN Money's Retirement Planner.
Retirement, Part II: "Retirement money is for retirement; until then, keep your mitts off it." There's rarely a good reason to borrow against your retirement accounts, and almost never a reasonable excuse for cashing them out. Look elsewhere to find money to pay your debts or buy a home. Let your retirement money keep working for you undisturbed. Someday, you'll be glad you did.
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Student loans: "Your total borrowing shouldn't exceed what you expect to make your first year out of school." Many graduates have learned to their chagrin that student lenders will gladly loan you far more money than you can comfortably repay. Students and parents need to put their own limits on how deeply they go into debt, or they could face a literal lifetime of student-loan payments. Read "How much college debt is too much?" for more details.
College savings: "Saving for retirement is more important, but try to put at least $25 a month per kid in a college savings plan." Your child can get student loans, but no one will lend you money for retirement. That's why retirement comes first. But contributing even a small amount each month will help reduce the amount of debt your child eventually incurs. Thanks to recent tax law changes and reductions in fees, 529 college-savings plans have emerged as the best way for most parents to save. To learn more, read "How Uncle Sam wants you to save for college."
Cars, Part I: "Buy used and drive it for at least 10 years." This one rule of thumb easily could save you tens of thousands of dollars over your lifetime compared with what you would pay buying cars new and owning them just five years. Not only will you buy half as many cars, but you'll avoid the 20% or so loss to depreciation that happens as soon as you drive a new car off the lot. Today's cars are better built and will last longer than ever before, so buying used isn't the gamble it used to be.
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Cars, Part II: "If you must borrow to buy a car, follow the 20/4/10 rule." Which means: Make a 20% down payment, don't borrow for more than four years and don't agree to a monthly payment that's more than 10% of your income -- or 8% if you plan to buy a home in the next few years. A substantial down payment ensures you'll have equity in your car when you drive off the lot -- which is important, since owing more on your car than its worth can leave you financially vulnerable if the vehicle is totaled or stolen. (Read "Close the gap in your car insurance" for more details.) Limiting the loan term and monthly payment will keep you from overspending.
Cars, Part III: "To compute and compare the real monthly cost to buy, insure and operate a car, double the price tag and divide by 60." You can get more precise figures about how much a car will cost over five years by using Edmunds.com's "True Cost to Own" calculator. But this rule of thumb will help you determine if that car you think is affordable actually will be once all costs are factored in.
Continued: Credit cards, mortgages and more
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