Comments on: Your Take: What Are Your Rules of Thumb?

By: Vic

Vic — Mon, 12 Oct 2009 20:46:06 +0000

- Invest your raise
- ‘Divide & conquer” I split my income between bank accounts & CD’s to make it less of a temptation to spend
- Ask “is it a want or a need?” when buying something you are unsure about. Usually, the 10 second pause will result in putting it back on the shelf.
- STOP EATING OUT. I usually bring snacks from home in bulk to keep me from hitting up the snack machine. i.e poptarts cost $1.00 in the vending machine vs the 38 cents I pay buying it in bulk at walmart.
- Make saving a game.
- Maximize the grace period of a credit card. I buy everything on credit and pay it off in full before the due date. My money sits in the bank earning interest while I use theirs for the time being for free

By: Dave

Dave — Mon, 12 Oct 2009 14:48:19 +0000

The only rule of thumbs I follow are spend less than you earn, and don’t buy a house if you think you will move within 5 years.

By: Jill

Jill — Mon, 12 Oct 2009 06:23:42 +0000

re: Education – I once read something that said your total student loans (undergrad+grad) should not be more than 1 year’s worth of salary.

By: Jill

Jill — Mon, 12 Oct 2009 06:22:40 +0000

Financial planners usually use X months (3,6,9, depending on the planner and client) of non-discretionary expenses – meaning if you would cut it out if you lost your job, you don’t have to count it for purposes of an emergency fund. We cut out savings, cable, clothing, etc

By: Jill

Jill — Mon, 12 Oct 2009 06:21:20 +0000

My rule of thumb is never to buy anything the first time I see it – I go home and wait to see if I still really want it. if I do, I look for it online and compare prices across multiple websites before purchasing

By: cliff s

cliff s — Mon, 12 Oct 2009 00:27:47 +0000

My rule of thumb is to never borrow to buy a depreciating asset. OK borrow for a home, college education, investment in a business, but not for a car, wedding, vacation, toys, and so on.

By: centsandthecity

centsandthecity — Sun, 11 Oct 2009 12:49:49 +0000

I live in NYC and unfortunately a lot of the formulas and ratios just don’t work here. Thankfully our rent has stayed the same but we’ve increased our earning so now we are paying 30% of our take home pay on rent. I know many people who are paying 50%+!

By: Andrew

Andrew — Sat, 10 Oct 2009 17:07:16 +0000

In a high cost of living area, you won’t be able to save a year’s income while renting to come up with that down payment. Also, I have lots of cash, but that doesn’t mean I can afford expensive things.

By: Andrew

Andrew — Sat, 10 Oct 2009 16:55:59 +0000

True. The rule of thumb I’ve always heard is six months of expenses. I would also assume that someone facing a loss of income would pare back expenses to the bone, so that what was previously six months of expenses might become seven or eight.

By: daemondust

daemondust — Sat, 10 Oct 2009 15:16:20 +0000

Isn’t it a bit misleading to say ‘you need 6 months of your sallary’, but you aren’t going to continue to be saving while you’re living off your savings, so your expenses will be lower by the amount you save.

By: Greg

Greg — Sat, 10 Oct 2009 01:54:26 +0000

Mortgage = 2X annual income. You can afford a house anywhere if you have enough of a down payment. It may not be a beautiful McMansion but it will be roof over your head.

Car = Less than 20K for a known reliable brand/model IF you can pay cash. A rule of thumb that is in relation to income seems illogical. 1/4 or 1/10 either way, you could end up with car that only lasts 12 months or 12 years depending on what you purchased and how well you care for it.

Savings = 20%+. (Unless you started in your early 20′s and you are already nearing retirement) The rest of us cannot depend on SS or enjoying a pension. You can’t retire on hope, if you don’t save for the golden years, nobody will do it for you.

Emergency Fund = 6 months living expenses in an accessible account for routine challenges, 1K-$10K soundly secured if living in an area likely to have major natural disaster. (Thanks for the inspiration of a blog post for tonight!)

Once all retirement/savings/emergency fund are funded and bills are paid, the only rule of thumb left for a desired purchase is… do you have the cash. If you can’t pay cash, you can’t afford it.

By: Austin

Austin — Sat, 10 Oct 2009 01:46:37 +0000

I second this rule of thumb. Unless it’s a house or an emergency I don’t see any reason to put yourself in debt with a purchase.

I notice a lot of my peers get themselves into consumer debt because they don’t realize how much they’re actually paying in interest every month. Scary stuff, and my rule of thumb will hopefully keep me away from this.

By: Martha

Martha — Fri, 09 Oct 2009 20:54:19 +0000

I loved your “Rule of Thumb” about weddings! Many of our friends are getting married now and I feel that the pressure to spend so much puts many people into debt for one day. I used many “Bridal Bargains” to try and save many pennies during our big day.

By: Manisha Thakor

Manisha Thakor — Fri, 09 Oct 2009 20:18:05 +0000

Jim, thanks so much for asking this question. LOVE the way financial rules of thumb can help one break through “analysis paralysis” when making big decisions. The following are ones that I’ve found super helpful:

* HOME: Keep the total purchase price of your home to 3x or less of your household income… and less is better (assuming 20% down, a 30-year fixed rate mortgage and normal interest rate environment, should keep your total all in housing costs to 30% or less of your gross income)

* CAR: Keep total purchase price of all household automobiles to 30% or less of total household income (again,less is better). Should keep total all in transportation costs to 10% or less of your gross income (assuming 20% down, 5-year max loan period, and mid single interest rate)

* EDUCATION: Don’t take on more in total debt than you think you will earn on average over your first 10 years out of school (logic: if you are devoting more than 10% of your gross income to student loan repayments for more than 10 years, you severely cramp your ability to save for other lifetime goals).

* WEDDINGS: If you can’t pay for it in cash, don’t add it into your plans. You want to remember the day forever… but not because you are paying for it forever!

* RETIREMENT: If you start saving in your 20s & 30s, 10% is a good number to target tucking away for your golden years… but for each additional decade that you delay add another 5% to that figure.

By: Financial Samurai

Financial Samurai — Fri, 09 Oct 2009 19:49:45 +0000

I agree. We use the 30/30/3 rule (30% of gross cash flow goes to service the debt), 30% cash in the bank for the downpayment, and house equals to around 3X the value of your gross annual income).

It all depends on your security and income outlook too. Bay Area is indeed tough to settle on just 2X annual gross. 3X-5X annual gross is more likely for most out here.