While situations vary and there are no ‘one-size-fits-all’ rules for managing money, there are sensible guidelines for spending and saving that have long stood the test of time. Here are five basic financial guidelines consumer advisors recommend.
- 50/30/20 for Budgeting – Perhaps the oldest but still relevant rule for budgeting is that of 50/30/20; that is, 50% for necessities like housing, food and bills, 30% for discretionary spending on vacations, dining out and entertainment, and 20% for paying off debt, saving for retirement and other financial goals.
- The 10% Retirement Rule – Saving 10% of gross income for retirement has long been the gold standard. But at the current rate of inflation, and given that people are living longer, saving 20% for your golden years may be wiser.
- The Six-Month Rule for Emergencies – Job loss, unexpected expenses and all sorts of other emergencies can upend anyone’s life. That’s why it’s important to have six months’ worth of expenses in a readily accessible account.
- The 20% Rule for Buying a Home – While there are many ways to finance a home with less of a down payment, sticking to the traditional 20% down payment guideline will not only increase your chances of being approved for a mortgage, but can significantly lower your monthly payment.
- The 20/4/10 Rule for Buying a New Car – Buying a used car makes good financial sense. But if you purchase a new car, be prepared to put at least 20% down, finance it for four years to incur little or no interest and allocate no more than 10% of your income on your car payment. For maximum value, plan to drive it for 10 years or more.