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6 Rules of Thumb Everyone Should Know

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 [1]. 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.

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