Follow Rules of Thumb For Financial Well-Being

Posted: April 10, 2012

April is National Financial Literacy Month. It’s a great time to assess your finances and take steps to improve your financial well-being.

   The financial industry has established some rules of thumb to help us determine how much we should spend and save. These guidelines are helpful to ensure we maintain financial health and live within our means. Check yourself against these measures to determine your financial status.
     * Rule #1 – Your  house payment, including taxes and insurance payments, should not exceed 28 percent of gross income. For example, if you make $50,000 a year, then you can afford housing expenses of $14,000 per year.
     * Rule #2 - Your monthly debt payments including house, car, student loans, and credit cards should be no more than 35 percent of your monthly gross income. Some mortgage brokers may stretch this ratio to 40%, but this leaves you very little room for error or unexpected expense.
     * Rule #3 - Save at least 10% of your income. The easiest way to do this is to pay yourself first. Your employer may be able to redirect 10% automatically, or if not, write a check to your savings account.
     * Rule #4 - Have 3 to 6 months of expenses saved in an account for emergencies. This can be a challenge but if you follow rule #3, you may soon find this goal within your reach.
     * Rule #5 - Short-term debt should not be more than 20% of your income. Add up the minimum payments on your credit cards, your car and student loans, and other forms of debt. If this number is more than 20% of your income, you need to make efforts to reduce this debt. Avoid adding to your debt until you can reduce it.
     * Rule #6 – When planning for retirement, strive to save 20 times what you want to live on each year. If you want to have $75,000 to live on annually, you’ll have to save $1.5 million. If your house is paid for, you may need less money, or if you intend to retire early, you’ll need more.
     These rules of thumb are general guidelines to help us to live within our means and do not take into account unique factors about particular families. So we may not be able to meet all of these guidelines but they give us something to work toward for solid financial health.

Karen Thomas is a family and consumer sciences educator for Penn State Cooperative Extension in Lackawanna County.