To calculate a restaurant server’s tip, double the first number on the bill. A $62.47 tab gets a $12 tip. If the bill is more than $100, double the first two digits.
That’s an example of a money rule of thumb that is imperfect but useful, which is the idea — inexact starting points for goals, conversations and calculations.
Americans apparently could use the help. Many are winging it through their financial lives without confidence in their ability to afford retirement, an emergency expense or even daily living costs, according to a survey by The Associated Press-NORC Center for Public Affairs Research.
Money-related benchmarks can help and are especially timely as we turn to a fresh decade and make money resolutions anew. Still, finances need regular monitoring for budgeting, assessing progress toward goals and evaluating debt reduction, said Paul Golden, spokesman for the National Endowment for Financial Education.
“As you condition yourself, you can build on more time [to review finances], but use a half-hour a week as a starting point.”
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Try to save 15% of income for retirement. Aim to replace about 70% of your preretirement income. And when you tap the nest egg, drain just 4% per year.
Start an emergency fund with $500 and eventually build it to three to six months of essential living expenses.
Other rules address specific situations:
Limit student loan borrowing to the amount you expect to earn in your first year working.
Full-time hourly workers can double their wage rate and tack on three zeroes to approximate their annual earnings. Making $15 per hour yields about $30,000 per year.
Professional advice and online calculators will provide more accurate and detailed answers, especially for people who have unusual money situations. But here are some handy rules of thumb to get started.
50/30/20 budget. Figure half of your take-home pay should go toward “needs,” such as housing, food and transportation. Then 30% goes to wants, and 20% funnels to savings and debt repayment.
Rule of 10. For big discretionary purchases, reflect on how it will make you feel in 10 days, 10 weeks and 10 years. Perspective can calm buying urges for purchases you later regret. Related: Give yourself cooling-off time equal to one day for every $100 the purchase costs.
Term life insurance. Buy a policy worth 10 times your gross annual income only if somebody else depends on your income.
Kid allowance. Give $3 weekly per grade level in school. A fourth-grader gets $12. The overall average is $30 per week, according to a survey by the American Institute of CPAs.
Windfall. Do responsible things with cash infusions, like a tax return or inheritance. But set aside 2% to blow on something fun, so you don’t feel deprived.
Housing
House payment. Your mortgage, including taxes and insurance, should not exceed 30% of your gross monthly income.
Cars
Car payment. Limit payments to 10% of your monthly take-home pay, so you can keep your total car costs — gas, insurance, repairs and maintenance — below 20% of your income. Also, put 20% down and limit the loan term to four years.
Repair or replace.Replace your car if a repair costs more than your car is worth — as determined by, say, Kelley Blue Book — or exceeds one year’s worth of monthly payments.
Saving and investing
Net worth. Net worth is the number that sums up your money life. One measuring stick: All you own minus all you owe should equal your age times your gross income divided by 10, according to the book, “The Millionaire Next Door.”
Rule of 72. Divide 72 by your expected annual rate of return to estimate how many years it will take for an initial investment to double. At 6%, the investment replicates in 12 years.
Financial freedom. Achieved when savings are at least 25 times your annual expenses.
Credit and debt
Total debt. All debt payments, including mortgage, should be less than 36% of monthly gross income.
Credit card bonus. On rewards credit cards with an annual fee, look for a sign-up bonus value equal to three years or more of its annual fee unless it has especially valuable rewards or benefits.
Card use. Keep credit card balances at 30% or less of their limits to avoid hurting your credit scores.
This article was written by NerdWallet and was originally published by The Associated Press.
Figure half of your take-home pay should go toward “needs,” such as housing, food and transportation.Then 30% goes to wants, and 20% funnels to savings and debt repayment. Rule of 10. For big discretionary purchases, reflect on how it will make you feel in 10 days, 10 weeks and 10 years.
The 70-20-10 budget formula divides your after-tax income into three buckets: 70% for living expenses, 20% for savings and debt, and 10% for additional savings and donations. By allocating your available income into these three distinct categories, you can better manage your money on a daily basis.
The 50-30-20 rule recommends putting 50% of your money toward needs, 30% toward wants, and 20% toward savings. The savings category also includes money you will need to realize your future goals. Let's take a closer look at each category.
The 75/15/10 rule is a simple way to budget: Use 75% of your income for everyday expenses, 15% for investing and 10% for saving. It's all about creating a balanced and practical plan for your money.
To budget effectively using the 50%, 30%, 20% rule, track your expenses, prioritize essential needs, be mindful of wants, and consistently allocate savings or debt repayment within the designated percentage.
60/40. Allocate 60% of your income for fixed expenses like your rent or mortgage and 40% for variable expenses like groceries, entertainment and travel. 30/30/40.
If the 50/30/20 budget was once considered the golden standard of budgeting, it's not anymore. But there are budgeting methods out there that can help you reach your financial goals. Here are some expert-recommended alternatives to the 50/30/20.
The 40/40/20 rule comes in during the saving phase of his wealth creation formula. Cardone says that from your gross income, 40% should be set aside for taxes, 40% should be saved, and you should live off of the remaining 20%.
Consider an individual who takes home $5,000 a month. Applying the 50/30/20 rule would give them a monthly budget of: 50% for mandatory expenses = $2,500. 20% to savings and debt repayment = $1,000.
It's an easy way to calculate just how long it's going to take for your money to double. Just take the number 72 and divide it by the interest rate you hope to earn. That number gives you the approximate number of years it will take for your investment to double.
The Rule of 72 is a calculation that estimates the number of years it takes to double your money at a specified rate of return. If, for example, your account earns 4 percent, divide 72 by 4 to get the number of years it will take for your money to double. In this case, 18 years.
The value 72 is a convenient choice of numerator, since it has many small divisors: 1, 2, 3, 4, 6, 8, 9, and 12. It provides a good approximation for annual compounding, and for compounding at typical rates (from 6% to 10%); the approximations are less accurate at higher interest rates.
Every economic entity must present accurate financial information. To achieve this, the entity must follow three Golden Rules of Accounting: Debit all expenses/Credit all income; Debit receiver/Credit giver; and Debit what comes in/Credit what goes out.
When your bank balance is looking healthy after payday, it's easy to overspend and not be as careful. However, there are several issues at play that result in people relying on borrowing money, racking up debt and living way beyond their means.
With the 70:20:10 model you learn 70% from on the job experience and from doing. You learn 20% from others in the way of observing, coaching and mentoring. 10% is down to formal training like courses, reading and online learning.
The idea is to divide your income into three categories, spending 50% on needs, 30% on wants, and 20% on savings. Learn more about the 50/30/20 budget rule and if it's right for you.
The 70-20-10 budget is ideal for people who are beginning to learn how to manage their income. One of the disadvantages of the 70-20-10 budget is that it doesn't separate discretionary spending from costs of living.
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