Managing finances is rarely easy and most people without experience doing so often end up getting everything in a muddle. If you want to start getting your finances into order however, there are five simple yet important financial rules that you may want to start to live by.
- 50-30-20 Rule
Nowadays this is the most popular rule to plan your monthly budget and essentially it will help you break down your expenditure between necessities, luxuries and savings. Based on it, you should spend 50% of your income on necessities (i.e. housing, bills and so on), while 30% can be spent on luxuries and entertainment, and 20% should be put into savings. It should be noted that this ‘rule’ is more of a guideline really, and while it is a good structure to follow you should adapt it according to your circumstances.
- 20-Down Rule
When you’re taking out car or housing loans, try to aim to place a 20% down payment in each case. Although this is an old rule that stopped being used for some time as it became easier to take out loans with smaller down payments, it will help you to dramatically reduce the overall interest that you end up paying. More importantly it is a good yardstick to measure whether or not you really can afford the property or car in question.
- 3-Month Emergency Fund Rule
It is always a good idea to have a little bit stocked away as an ‘emergency’ fund just in case something happens – though opinions tend to differ on exactly how much you’ll need. At bare minimum your emergency fund should cover 3-months of expenses comfortably, though if you can stretch it to cover 6 months that would be even better.
- High Interest First Rule
When dealing with debt of any kind (i.e. credit cards, student loans, mortgages) it is important that you pay off the one with the highest interest rate first. In the long run that will reduce the overall sum that you need to pay off, which is why it is a good idea. Sometimes it may even be wise to look for guarantor loans (also known as buddy loans) to help pay off loans with exceptionally high interest rates faster so that you save more in the long term.
- The Age Rule for Bonds and Stocks
It may seem odd, but if you want to find out how big a percentage of your investments should be in stocks, subtract your age from 120 (the old 100-year rule was revised). The idea behind this is that stocks tend to be riskier than bonds, so when you are younger you can afford to have more in stocks but as you age you should shift more of your investments into bonds. It also assumes that you intend to retire around 65 – so you may want to adjust it accordingly if you want to retire sooner.
As you can see these rules are simple enough, and yet will provide you with a nice structure upon which you can base your financial decisions around. That being said you should always remember that personal finance is personal at its core – and circumstances will differ from person to person.
In short while these rules can help to give you a structure, you should not make them a set of absolute laws that must be followed. Use them to guide your finances, and adapt them as needed to fit your personal circumstances. If you can do that, then in the long term you’ll undoubtedly find yourself in a stable financial position – or well on your way towards it.