The 8 Best Financial Rules of Thumb You Won’t Regret
Here Are the Top 8 Financial Rules You Need in Your Life:
Everything gets a whole lot easier when you have a few key financial rules to keep your budget in check. Instead of hoping that you do not overspend every month, make sure you don’t even by giving yourself goals and guidelines.
These simple rules can give you the foundation you need to make better day-to-day financial decisions and get you one step closer to financial freedom.
While everyone’s financial situation is different, these rules act as a good starting point.
1. The Zero-Based Budget
The zero-based budget works on the principle of assigning every dollar a job at the beginning of the month. This means that you have a specific amount assigned to every expense category such as $500 for groceries.
The zero-based budget works on the idea that your income minus all expenses will equal zero, but this does not mean you need to spend every penny. You can assign, for example, $200 towards savings which also counts as an expense.
2. The 20/4/10 Rule for Buying a Vehicle
The 20/4/10 rule is the one that I see most people ignore when they buy a new vehicle. It is easy to get attached to that brand new car in the showroom even though your wallet may not be able to deal with your new love. This is where the rule comes in.
When you are buying a new car, make sure that you put down at least 20% of the total cost and finance the new vehicle for no more than 4 years.* A car is a depreciating asset which is why it is important to make sure you do not wind up paying installments towards the total cost for years to come. Finally, your monthly outgoings for your car should not be more than 10% of your gross income. This includes vehicle payments, fuel, insurance, and regular maintenance.
*EDITOR’S NOTE: Money Fit never recommends financing a vehicle. We believe large monthly car payments top the list of household expenses that cause long-term financial troubles. Money Fit promotes debt elimination, not debt accumulation, especially of an asset that loses up to 25% of its value within twelve months. That said, we recognize that no matter what we say, many American consumers are married to their car payments. If you are going to get a car loan, minimize the overall cost of the vehicle while also minimizing the monthly payment. This rule is a better guide than many others we have seen.
3. Do Not Use Credit Cards
Credit cards allow you to get into the habit very quickly of spending money that is not yours. It is a debt spiral not many can get away from, and it often includes high-interest rates, recurring monthly payments, and a bad credit score. Rather than approach credit card debt indifferently, do whatever it takes to be debt-free.
4. Stop Keeping up with the Joneses!
Buying the new iPhone or an unnecessary branded handbag are things you should definitely not be doing if money is a worry for you. If you have to make monthly payments to buy a phone, something is wrong. Instead, ask yourself what you can afford!
A $200 phone does everything you need but people still pay $1200 for a phone that has a half-bitten apple at the back. Reevaluate your priorities and give yourself 5-year financial goals you can aim at reaching. Every time you think you are going to crack and spend money needlessly, remember those goals.
5. Get Every Single Penny of Employer Matching from Your 401(K)
Employer matching occurs when your employer contributes to your 401(k) based on your own annual contributions. Not taking full advantage of this offer right down to the cent should be criminal because it is essentially turning down future money.
If a 401(K) or its nonprofit cousin, the 403(B) are options for you, invest as much as you can. Your future self will thank you.
6. Pay off High-Interest Student Loans First with the Avalanche Method
The avalanche method involves making the minimum payments for all your student loans and then using any extra money to pay off the student loans that have the highest interest rates. This is the smartest debt payoff method in most cases because you will save money in the long term.
In comparison to this, the debt snowball method which involves paying off the smallest loan first is not as effective in the long run. Additionally, the debt landslide method involves paying off the newest account first to rebuild your credit the fastest.
While the snowball method does give you the ability to have small wins that keep you motivated, the real benefits of the avalanche come from getting rid of those high-interest loans that rob you blind.
7. Have an Emergency Fund
Even if your emergency fund is only a few hundred dollars, it can make the world of difference if you are ever in desperate need of cash. This is probably the most basic financial rule anyone can give you but often the most frequently ignored. Just under 40% of Americans can afford to cover an unexpected $1000 expense, which says a lot.
We all need a backup if things get rough, we lose our job, or we crash our car. Not having even a $1,000 to our name can make that really difficult.
8. Set Aside 1% of Your Home’s Value for Home Repairs
If you own a home of your own, yearly or even monthly repairs become a frequent expense you need to deal with. While you cannot guess the exact amount you may have to spend, the general rule of thumb is to set aside 1% of your home’s current value every year for any repairs that may be necessary.
If you wind up not using the money, great! Keep it saved up for any future decorating or costs that may come up.