6 Rules of Thumb Everyone Should Know

by Tax Guy - Burlington Accountant on September 14, 2009 Print This Post Print This Post

I was reading an article in Money Sense about 10 numbers you must know. This got me thinking about the numbers and rules of thumb I use in my daily practice and I searched around for some new ones.

Home Ownership

3.5 – This is roughly the amount of house you can afford on your gross annual income. If you make $100,000 per year, the most house you can afford is ideally $350,000 assuming a 20% down payment and a mortgage of $280,000 over 25 years. With a mortgage at 7%, the monthly payments would be $2,000 a month. Once you add utilities, property tax and insurance your using roughly 30% of your gross income (see 32% below).

32%   This is the percentage of your gross income you can afford for a home. One-third of your pre-tax income is devoted to paying your rent or mortgage, property tax, house insurance and utilities. Any more than that and you are in danger.

Buying A Car

20/4/10 – I found this one at Get Rich Slowly. These numbers represent the amount of car buy, finance and drive. You should put at least 20% down, finance for no more than 4 years and drive the car for at least 10.

Credit And Debt

750 – This is the ideal credit score to obtain a loan. The credit score (or FICO score) is a measure of your ability to service debt. A score of 300 is really bad and a score of 900 is perfect.

Money Sense suggests that in order to improve your score, keep the balance on your credit card below 35% of the limit, maintain your lines of credit to below 50% of the limit, and of course pay all of your loans and bills on time.

26% – This is the return on investment you’ll get by paying off your credit cards. You see, you make your credit card payments with after-tax dollars. So if your tax rate is 30% this means you need to earn 26% before tax to pay-off that 18.5% interest on your credit card.

6% – 8% – This a reasonable rate of return you can expect from an balanced investment portfolio.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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Karen Bradford September 14, 2009 at 11:03 am

FYI – Interesting bit of trivia…Rule of Thumb originated in colonial New England. Legally, it was how large of a whip, based upon diameter, a man could legally use to beat his wife.

Now that I know this I avoid using the phrase.

Tax Guy September 14, 2009 at 11:46 am

@ Karen:

Actually, the specific phrase did not originate from either the written or common law nor did apparently it have anything to do with a man beating his wife. If such a rule had existed, it would have been written in the English law or in the rulings provided by the English judges.

The actually term appears to have had its origins in woodworking and may have been used for measurements.

Although not authoritative, this article summarizes what my understanding of the term is http://www.debunker.com/texts/ruleofthumb.html

as September 15, 2009 at 7:08 am

I always found the World Wide Words site pretty British and good at digging up etimologies. Here’s what it says on the thumb rule question:


Tom @ Canadian Finance Blog November 24, 2009 at 5:15 pm

I was almost dead on with the 3.5x income for home ownership. Now with the wife on maternity leave I’m not so good, but that’s just temporary at least.

The 20/4/10 car is interesting, though I’m not a fan of debt for car loans. I’d prefer 100/0/10!

Tax Guy November 24, 2009 at 8:37 pm

@ Tom:

Maternity leave can definitely be a financial strain!

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