Follow these guidelines and your finances will be in good shape.  These guidelines are not meant to be indisputable laws or applicable in every situation, but these easily understood principals will give you a starting point for assessing how to handle your particular financial situation.

Retirement Savings:  10% – basics, 15% – comfort, 20% – escape

This rule works well if you start saving for retirement early (while in your late 20s or early 30s).  Saving at least 10% of your income ensures you will be able to cover your basic expenses.  Fifteen percent should be saved for comfortable living while 20% should be saved for early retirement or traveling during your retirement years.  There is rarely a good reason to borrow against your retirement accounts, and never a good excuse for cashing them out so look elsewhere for money to pay debts or buy a home and let your retirement money sit untouched.

Car Purchases: Buy Used And Keep It For 10 Years

This rule can save you tens of thousands of dollars over your lifetime.  You will buy half as many cars as someone that buys new every 5 years and you will avoid the 20% depreciation loss that happens when you drive a new car off the lot.  Cars are better built today and last longer than ever before, so buying a used car is not the risk it used to be.  If you must borrow to buy a car, make a 20% down payment, do not borrow for more than four years and do not agree to a monthly payment that is more than 10% of your income.

Debt Repayment: Pay Off Maxed-Out Cards First

When paying down credit card debt, pay down any card that is close to its limit first, since maxing out cards hurts your credit scores and can trigger penalty rates and fees.  Your primary goal if you carry credit card balances should be paying them off as quickly as possible.

Emergency Savings: Create An Emergency Fund Equal To Three Months’ Expenses

You should have at least three months’ worth of expenses saved up in cash to serve as a cushion against job loss or other disasters.  Saving that much money can take a while and many families have more important priorities to address first so space on your credit cards or an unused home equity line of credit can be used in place of a real emergency fund until you can save the cash.

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This entry was posted on Saturday, August 13th, 2011 at 8:19 am and is filed under tips. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.

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