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6 Financial Rules of Thumb to Make Your Easier

6 Financial Rules of Thumb to Make Your Easier Posted on March 26, 2018Leave a comment

Rules of thumb can be a very valuable tool. They are like roadmaps that show you the easiest route to your destination. They have been fine-tuned over time with trial and error. But most importantly, rules of thumb steer us so we don’t make the painful mistakes of those who came before us. No need to learn the hard way.

Most facets of life have guiding rules and today we are going to look at some of the more important rules of thumb in the financial world.


The 20/4/10 Rule


This rule applies to purchasing a vehicle. The rule goes as follows: put 20-percent down, you should not finance your car no more than four years and you need to spend no more than 10-percent of your income on transportation expenditures, such as gas and insurance.

The idea behind this rule is so you don’t over-extend and buy a car you cannot afford in the long run.


The 10-Year Rule


            Sticking in the automotive sphere, the 10-Year Rule focuses on whether to buy your vehicle new or used and to minimize how much depreciation you incur. For instance, if you buy used, a vast majority of the depreciation happened with the first owner. But if decide to buy new, be prepared to keep the vehicle for 10-years so that you can take advantage of its value and depreciation won’t affect you as much.


The 50/30/20 Rule   


            If you are wanting to start a budget but not really sure where or how to get started, the popular 50/30/20 Rule may be a good place to start. Basically, this rule breaks down how to allocate your income. Per the rule, 50-percent of your income should be devoted towards necessities like rent, mortgage and bills. Thirty-percent acts as disposable income, dedicated towards your wants, like going out to eat or going to the movies. Finally, 20-percent should go towards achieving your financial goals like paying off debt or retirement savings.


The Income Rule


            When in the market of buying a house, The Income Rule is one you should keep in mind. The rule states that you shouldn’t buy a house that costs more than 3-years’ worth of your annual income. Similar to the 20/4/10 Rule for automobiles, this rules is helpful so you do not bite off more than you can chew when purchasing a house.


The 20-Percent Rule


Another house purchasing rule to help put you in the best position going forward. With the 20-Percent Rule, you should save at least 20-percent of what the house cost before pulling the trigger. The benefits of doing so are large. You can lower your monthly mortgage while improving your prospects of securing a loan. While saving an amount so large might be difficult, you will be happy in the long run that you did when you have more financial flexibility.


The Emergency Funds Rule


This rule says that you should save at 3-to-6-months’ worth of money in case of an emergency. Having that kind of cash in the reserves can make your life far less stressful if something were to come up that prevents you from earning a paycheck.

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