Animals 'dressed' in scarlet hues
Most adults are wildly unprepared to manage their own finances, even after receiving a full education, since money management isn’t considered mandatory education. But when bills and debts start accumulating, and your plans for the future get closer and closer, it’s an immense help to have some general rules to follow.
The following rules of thumb are well-known by finance experts and they’re a great starting point for learning how to manage your money, but keep in mind that everyone’s situation is different and there are no one-size-fits-all rules when it comes to budgeting and spending. With that, click through to get the financial advice that could change your life.
Probably the most widely known rule for budgeting is the 50/30/20 rule, which means 50% of your income is for necessities (housing, bills, food, etc.), 30% for wants and lifestyle experiences (dining out, vacations, hobbies, entertainment, etc.), and 20% for financial goals (paying off debt, saving for retirement, etc.).
Saving 10% of your gross income for retirement is another well-known rule of thumb, particularly because it gives people a simple, achievable number to work with. Experts say, however, these days it’s better to aim a little higher, up to 20%.
Our lives can turn upside down at any moment, which is why it’s a rule of thumb to have six months’ worth of expenses saved in case of an emergency. If you’re a double-earner household or have a second source of income, then a minimum of three months' worth of expenses is the recommended amount.
No, sadly this doesn’t mean spending money on yourself. Instead, this old rule of thumb helps you prioritize saving, because even if your budget is tight, you should be putting money away first before you allocate it elsewhere.
The rule of putting at least 20% down when buying a home ensures that you limit the total amount you borrow, it lowers your monthly mortgage cost, and it can increase your chances of being approved for the loan.
If you have to borrow when buying a car, to avoid spending more than you can afford you should put down at least 20%, keep the loan limited to no more than four years (to avoid interest), and spend no more than 10% of your gross income on transportation costs (which includes the car payment, parking, gas, and insurance).
When trying to decide whether to buy a used car or a new one, it’s typically financially wiser to buy used. But if you want to buy new, you should plan to drive the car for 10 years or more.
Though this can be quite a varying number depending on where you live and how much you make, the cost of rent and utilities should ideally be 30% of your income or less.
It can be tempting to splurge once you receive a raise, but when you already have a salary that funds a budget and lifestyle you’re happy with, anything higher should go to savings. This way you won’t inflate your lifestyle spending, and you’ll be able to grow your savings much quicker.
If you receive a nice sum as a gift, inheritance, or a bonus, the general rule of thumb is to use 12% of that on yourself right away, and then put the rest in the bank for a few months to properly consider the best way to spend it.
Since stocks are more risky than bonds, it’s advised that the older you get, the less you invest in stocks. Experts suggest subtracting your age from 100 (many also say 110, or 120) to find the percentage of your portfolio that should be in shares.
Debt repayment is a tricky field, but this simple rule of thumb will help you save the most and get your debt paid off the quickest.
If you’re not so great at keeping track of a budget, your primary focus should at least be tracking the areas where you tend to overspend, like dining out or buying clothes.
Food is a difficult budgeting area, especially when the hunger strikes and your fridge isn’t stocked, but the general rule experts advice is spending about 10-15% of your budget on food.
The amount you spend monthly on things like entertainment, haircuts, clothing, etc. will vary, but it’s best to keep it under 10% of your budget.
As a parent, this might feel counterintuitive to the desire to put your kids first, but keep in mind that children can borrow money for school in a way that you can't for retirement.
The rule is to not take out more in student loans than you expect to make your first year on the job. While it's aimed at helping people take out an amount that they’ll actually be able to repay, skyrocketing tuition rates in some places coupled with increasing unemployment rates among fresh grads make this a tricky one.
To figure out how long it will take your investment to double, divide 72 by the expected growth rate of your investments, expressed as a percentage. For example, if you expect to earn 10% per year on your investment, it will take you about 7.2 years to double your money.
You should generally aim to have your portfolio double every 10 years, to make sure your investments are on track and growing well.
When an appliance like a fridge, TV, dishwasher, etc. breaks, buy a new one if the appliance is eight or more years old or the repair would cost more than 50% of the replacement cost.
If you have a mortgage, you should put no more than 30-35% of your net income towards minimum debt payments. Experts say the 30-35% range is often what mortgage lenders will look at when considering debt-to-income ratio. If you don’t have a mortgage, the same percentage rate applies to both minimum debt payments and your monthly rent.
The rule of thumb for property owners is that you should fix your mortgage rate at least as long as you plan to be in your home, and only consider a variable-rate mortgage if you're planning to move on in a couple of years.
It can be hard to know how much you’ll really need in retirement, but the general rule for calculating your annual retirement needs is by figuring out your current pre-retirement expenses and adding 10%.
Some employers offer to match some retirement investments, and it's generally viewed as very financially wise to save at least enough to get that match.
Not sure how to know if you’re financially ready for a car? A helpful way to estimate the cost of owning a car is to double the price tag and divide that by 60. If the car costs US$10,000, it’ll cost around $333 per month for all its expenses, including plating and insurance, so around $4,000 per year.
When deciding how much term coverage to get for life insurance, one useful tool is to multiply your gross annual salary by five or six, and try to get at least that much total coverage.
How to know if you’re saving enough money? A general guideline is that by age 35 you’ve saved one annual salary worth, by 40 you’ve saved twice that, by 55 you’ve saved three times that, and so on.
Oftentimes we feel alone in our financial planning, and it can be a huge undertaking that gets lost in the pile of career, relationships, and enjoying our lives. Don't be afraid to ask for help!
Sources: (Lifehacker) (The Dough Roller) (Canstar)
Financial guidelines everyone should know
Do you know how to handle your finances?
LIFESTYLE Money
Most adults are wildly unprepared to manage their own finances, even after receiving a full education, since money management isn’t considered mandatory education. But when bills and debts start accumulating, and your plans for the future get closer and closer, it’s an immense help to have some general rules to follow.
The following rules of thumb are well-known by finance experts and they’re a great starting point for learning how to manage your money, but keep in mind that everyone’s situation is different and there are no one-size-fits-all rules when it comes to budgeting and spending. With that, click through to get the financial advice that could change your life.