When it comes to financial health, every financially responsible person should follow dos and don’ts. Here are six excellent financial rules of thumb that, if followed, can save you BIG!
Say NO to Credit Cards
Saying no to credit cards is a rule of thumb that every person should follow. I know some would argue that they are good for emergencies, but a better idea would be to use the money you save on credit card high-interest payments to start an emergency savings account, one that gains your interest. Credit card debt is a billion-dollar industry and mainly from the interest people pay, not the principle. Even if you have a fantastic credit score, say no to a credit card and keep it that way.
Don’t Buy an Expensive Vehicle
While many vehicles are a status symbol, paying a lot for status is not a good rule of thumb. The good rule of thumb when it comes to purchasing transportation is the final price should not be more than half of your yearly income. If you can’t afford to pay for a vehicle in cash, only buy from a dealership where you can get a decent interest rate and affordable car payment amount not to exceed a quarter of your monthly income. When negotiating, make the salesperson give you the final total cost of the car with and without interest, don’t let them only give you the price in the monthly payment amount. This way of presenting the cost of the vehicle often hides high-interest rates or vehicle price. And of course, as always, buy used if you can.
Be Choosy About Insurance
The rule of thumb on insurance is only buy what you need. Because insurance is something you pay into “just in case,” you must be smart when purchasing it. Some insurance is required by law, such as automobile insurance; therefore, get the best coverage but shop around for the best prices, I could make hundreds of dollars of difference. Health insurance, homeowners or renters insurance, and life insurance are other types of coverages you should have, but shop around for the most excellent coverage and the least expense.
10/10/80
Savings should be the number one priority of every financially responsible person. There is a rule that says save 10%, give 10%, and spend 80% as a simple means of allocating your income. While this is an excellent rule of thumb, this should be a starting point towards savings and giving. The most important thing is that you save, give, and thoughtfully spend. You can adjust the allocation percentages to fit your goals and lifestyle. But one rule of thumb that comes from the 10/10/80 method is that savings are first, not last. Warren Buffet explained that you should save first before you spend, not the other way around.
50/30/20
50/30/20 is another money allocation rule of thumb. This rule of thumb also has savings built-in, but only after debt is paid off. This rule is 50% of your income for necessities and bills, 30% towards financial goals such as paying down debt and savings, and 20% to wants, which is anything you desire to purchase that isn’t in the other two categories. This rule of thumb can be adjusted according to your lifestyle, but it does not prioritize savings like the 10/10/80 rule of thumb.
20% Down Payment
The 20% down payment rule is the idea that anything you will buy on credit should have 20% of the total cost saved before the purchase. This rule is mostly applicable to purchasing a home or a vehicle. The idea is that paying 20% of the total cost upfront will lower interest and payments, adding up to considerable savings when the final payment is made. This rule can be applied to anything you buy on credit, even if the place of purchase doesn’t accept a down payment. If you can pay down 20% of the total cost in your first payment, this will bring you to your payoff date sooner and save you money on interest.
Conclusion
Financial health and freedom should be every financially responsible person’s goal. While there are many things you can do to contribute to your financial health and freedom, using one or more of these rules of thumb will ensure you reach this goal.
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