Money rules of thumb can be inaccurate because people's financial lives differ so much. But they can help us make difficult decisions or give us benchmarks. Here are a few:
- Rule of 10: For perspective on big purchases, think about how you will feel about it in 10 days, 10 weeks and 10 years. For a luxury car: In 10 days, I'll still be excited about the new-car smell and its nice ride. In 10 weeks, it's just the machine I use to get to work and the supermarket. In 10 years, I'll barely remember this car.
- House payment: Your mortgage, including taxes and insurance, should not exceed 29 percent of your gross monthly income.
- Car payment: All vehicle payments should not exceed 15 percent of your take-home pay.
- Total debt: Total monthly debt payments should not exceed 36 percent of your gross monthly income.
- Car repair: If the auto repair costs less than half of the trade-in value, repair it. Otherwise, considering selling it and buying another.
- Holiday gifts: Spend no more than 1.5 percent of your gross income on the holidays, including gifts and travel.
- Savings: Save 10 percent of your take-home pay. Some would say that should be on top of retirement savings.
— Kids' allowance: Give $1 weekly per grade in school. A fourth-grader gets $4.
— Life insurance: Buy a policy worth six to 10 times your gross annual income.
—Restaurant tipping: To quickly figure a generous tip, double the first digit on your bill. For bills more than $100, double the first two digits.
— Emergency fund: Keep a rainy-day fund equal to three to six months of expenses.
— Debt payment: Pay debts from highest interest rate to lowest. Or from the smallest amount to largest.
— Mutual funds: Be wary of funds with an expense ratio of more than 1 percent.
— College borrowing: Don't borrow more money than you'll make in your first year working after graduation.
— Asset allocation: That's how you should split your long-term investing between stocks and bonds. A conservative rule of thumb is 100 minus your age goes in stocks; the rest in bonds. More aggressive is a stock allocation of 110 minus your age.
— Organic produce: If it has a thin skin that you eat, such as apples, spend extra for organic. If it has a thick skin that's discarded — say, bananas — save your money. It's about exterior pesticide residue.
— Choose experiences: In a choice between spending on things or experiences with other people, choose the latter. Research shows it makes us happier.
— Carry a credit card balance.
— Lend money to friends and family.
— Borrow from your 401(k) or cash out early.
— Pay fees on a checking account.
— Buy an extended warranty.
— Buy an investment you don't understand.
Gregory Karp is a personal finance writer for The Morning Call newspaper in Allentown, Pa. Readers may send him e-mail at greg.karpmcall.com.