Everyone has a unique method for keeping track of personal finances and staying out of debt, but even so, there are some financial “rules of thumb” that stand the test of time. While not all kinds of debt are avoidable, there are some tried and true techniques that can help you remain financially stable, even in times of emergency. Here is a look at five financial rules of thumb from financial experts that can go a long way in keeping you out of debt.
Practice the 50/30/20 rule for budgeting.
The 50/30/20 rule for budgeting comes from Harvard bankruptcy expert Elizabeth Warren, and it is widely held as a standard for how much you should be spending and how much you should be saving every month. According to the rule, 50 percent of your income should go toward regular monthly expenses, such as housing and bills. Thirty percent should go toward wants, like dining and entertainment, and 20 percent should go towards your financial goals, such as paying down debt or saving for retirement.
Maintain a 6 month emergency fund.
You may remember reading about how to establish an emergency fund in our blog post about emergency funds here. The purpose of an emergency fund is to help you maintain a relatively normal lifestyle, even when unexpected expenses such as medical bills, car repairs, or job loss hit. Most financial experts recommend establishing an emergency fund with enough funds to cover 6 months’ worth of typical expenses.
Save at least 20 percent for a home down payment.
Financial experts frequently recommend saving up at least 20 percent of a home’s value for the home’s down payment, as it reduces your loan burden and even eliminates some expenses like mortgage insurance.
Apply the 20/4/10 rule when buying a car.
Similarly, 20 percent is actually the number that financial experts recommend for car down payments, as well. The 20/4/10 rule for buying a car states that you should put 20 percent down, spend 4 years or less financing the car, and spend no more than 10 percent of your gross income on transportation costs.
Don’t spend money you don’t have yet.
Many people know not to spend money that they simply do not have, but the lines get a little blurrier when it comes to expected income. You might be expecting a hefty tax return, for example, and therefore feel ready to invest in a new computer. However, it is always a safer bet to wait until the money is actually in your bank account. Retroactively financing your expenses can easily put stress your wallet, and this type of spending can easily escalate into a list of expenses that you cannot keep up with.