Wednesday, September 19, 2007

Some Money Rules of Thumb I Use recently published 16 favorite money rules of thumb by Liz Pulliam Weston. While rules are thumb (e.g. rule of 72s) are not as precise as doing the detailed analysis, they are often easy to remember and easy to use, especially when doing a quick assessment. Here were the ones from the article that I personally use:

  1. Retirement, Part I: "Save 10% for basics, 15% for comfort, 20% to escape." While the numbers may vary for different individuals, I think this a a great starting point. After getting started, one can do the more detailed analysis and make refinements. However, I do know that 0% won't cut it. For our goal of retiring early, we have been saving over 20% of my gross salary.

  2. Retirement, Part II: "Retirement money is for retirement; until then, keep your mitts off it." Fully agree. I would add don't think of borrowing as an acceptable way to use retirement money for very good needs (e.g. education or first home).

  3. Student loans: "Your total borrowing shouldn't exceed what you expect to make your first year out of school." My student loans equaled 40% of my starting salary and I recall feeling that amount of debt was burdensome. I couldn't imagine starting with student loans equal to my starting salary. However, I guess that is the nature of higher educational costs today.

  4. Cars, Part I: "Buy used and drive it for at least 10 years." I prefer keeping a car even longer, if mechanically possible. Also, I don't mind buying new if I keep it for at least 10 years. However, I tend to buy basic models (example base truck models) or brands that hold value (e.g. Toyota) when buying new.

  5. Mortgages, Part I. "If you can't afford to buy the house using a 30-year fixed-rate mortgage, you can't afford the house." Fully agree. I've written about this before in Avoiding an Expensive Mortgage Mistake.

For more on The Practice of Personal Finance, check back every Wednesday for a new segment.

Photo Credit:, Grtguru

This is not financial advice. Please consult a professional advisor.

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