Today I want to talk about rules of thumb.

What is a “rule of thumb?”

A rule of thumb is a rough estimate used to make quick decisions. It’s not based on any science or exact measurement, so don’t take any rule of thumb as gospel.

Here are 9 personal finance "rules of thumb" you should know if you want to make faster and smarter decisions:

1. Rent Rent is a big expense, if not the biggest, in your budget. Don't spend more than 30% of your net income on housing.

2. Retirement Life is short. You'll blink and be 65. Invest a minimum of 15% of every paycheck for retirement.

3. Emergency Fund Life happens. Keep at least 3 months of expenses in cash on hand at all times.

4. Buying a Car The second you drive a new car off the lot, it loses value. Buy used and keep your car payment below 10% of your monthly income. Better yet—pay cash.

5. Credit Cards Credit cards are a great tool when used responsibly. Pay your credit card statement in full every month to avoid interest and build credit. Or else, pay cash for everything.

6. Impulse Purchases Impulse purchases are real. Before making a big purchase, reflect on how it will make you feel in:

   • 10 days

   • 10 weeks

   • 10 years

     Then, wait 24-48 hours before making the purchase.

7. Life Insurance Again — life happens. Buy a term-life policy worth 10 times your gross annual income if somebody else depends on your income. Avoid whole-life insurance.

8. Financial Freedom Financial freedom is a number, not an age. You can achieve it when your savings and investments equal 25 times your annual expenses.

9. Employer Match If your employer offers a match, take it. It’s free money and a 100% return on your investment.

Conclusion

Again, these are not meant to be taken literally. Everyone's individual situation is unique, and there is no one-size-fits-all when it comes to personal finance. Use them as guide rails and assess your own situation.

See you next week.

Darrell