With a new found on saving and living within your means, here are a few financial rules to guide you to prosperity.
- Have enough cash to cover 6 months of living expenses: Give yourself a cushion of cash so you are prepared if you lose your job or have an unexpected expense. With more and more layoffs, you want to make sure you have money saved to help until you land your next job.
- Owe less than 30% of your allowable credit line on any one credit card: Card "utilization" is the second biggest factor in your credit score (payment history is #1). If you have an credit card with an available line of $11,000 the most you should charge on it is $3300. Any more than that and you risk having your credit score fall. Even if you pay off your balance every month, the amount you charge on your card counts toward your credit score. To get around the utilization issue, call or login to your credit card company and ask for an increase in your credit line.
- Monthly mortgage should not exceed 28% of your monthly income: The federal government formulated this percentage when they started insuring mortgages after the Great Depression. The historical home foreclosure rate in the U.S. was less than 1%. People and lending institutions started getting in financial trouble after they deviated from the 28% figure and as you know foreclosures are a national problem. (Check my previous post titled "Your Home is Not an Investment")
- Amount you need to retire on equals 25 times your desired income: Many academic study's have finding the optimal amount a person should withdraw each year in retirement. The recommended rate of withdrawal in retirement has been 4%. If you want to live on $120,000 a year, you will have to save $3,000,000. If you want to take more money out or retire with less saved up you with have to take more investment risk which can lead to higher losses in short time periods.
- Keep auto loans to 60 months or less: If you extend a car loan past 5 years, you will have a much higher interest rate and the loan will be higher than the value of the car even after paying on it for at least 4 years.
