Everyone is different when it comes to personal finance and money, but there are a few life lessons and financial rules that seem to be necessary at all times. There is not necessarily any one rule of thumb to keep you out of trouble, but there are a few guidelines that will help keep you afloat.
How Much Debt is Okay?
One of the basic questions of finance is how much debt is it okay to have? Of course, the best option is to have nothing, but that is almost impossible in these times. Also, many items, such as a car or a home, will require you to take on some debt. The rule of thumb for many financial advisers has been that you should try and keep your debt below thirty-six percent of your monthly income. Working overtime to get that number down will help you in the long term, if that is something that you are comfortable doing.
Buying a Home
If you are looking to purchase a home, you need to start off by using your debt to income ratio. Your mortgage is a debt to your name, just like credit cards or a car loan, and it needs to be factored into that thirty-six percent previously mentioned.
Another rule is that you should never purchase a home that is more than 2.5 times your yearly income. This probably won’t be a problem in the current economy; however, as virtually no mortgage company will let you take out a loan for more than that amount anymore.
Also, it is recommended that you keep an emergency fund for those unforeseen circumstances. You never know when something may come up that will require your immediate financial attention. This could be in the form of health bills, car problems, a loss of income, or many other things that you never can see coming. It is recommended in this economy, and in any economy for that matter, that you have somewhere in the four to six month range of expenses ready. The easy part of this is that the number is easy to calculate. So take what your monthly expenses are and multiply it by six months. This will keep you safe in times of peril. Trust me; you feel much better if something happens and you have a nest egg to fall back on.
On these amounts, how much money should you try to save each month? Most people say that you should take at least ten percent of your monthly income and put this into savings. This should not be the amount you are putting into retirement. That amount is completely different.
Depending on your job situation, your company could have a matching program of the income you put away. This can vary, but with major companies, it can be up to five percent. This should not be the only money that you are putting away for retirement though. For younger people, you need to put away at least ten percent of your income, and it should increase as you get closer to retirement.
When you get close to that retirement date, you are going to need to have about eight percent of your yearly income coming in every year. This income can be from pensions, savings, and social security. For the younger generation, depending on social security is not recommended. If you want to look at this in one total sum, you should save twenty times your annual expenses that won’t be covered by incoming income each month. Don’t be scared by the amount that is required to retire. The facts are, if you are at a young age, you can have 30-40 years to build this amount up.
When looking to save money, the more you can put away, the better. We are living in a society that has been on a roller coaster as of late. This has readjusted most people’s priorities with their money in a good way. Don’t ever forget that you should treat yourself from time to time, as we need to be able to relax a bit no matter how tough it can be. Without a bit of relaxation, we will all be wound too tight. So go out and be smart with your money, but never forget to enjoy life.