Rules of thumb for managing your money

By Gregory Karp The Morning Call

Money rules of thumb can be inaccurate because people’s financial lives differ so much. But they can help us make difficult decisions or give us benchmarks. Here are a few:

Rule of 10. For perspective on big purchases, think about how you will feel about it in 10 days, 10 weeks and 10 years. For a luxury car: In 10 days, I’ll still be excited about the new-car smell and its nice ride. In 10 weeks, it’s just the machine I use to get to work and the supermarket. In 10 years, I’ll barely remember this car.

House payment. Your mortgage, including taxes and insurance, should not exceed 29 percent of your gross monthly income.

Car payment. All vehicle payments should not exceed 15 percent of your take-home pay.

Total debt. Total monthly debt payments should not exceed 36 percent of your gross monthly income.

Car repair. If the auto repair costs less than half of the trade-in value, repair it. Otherwise, considering selling it and buying another.

Holiday gifts. Spend no more than 1.5 percent of your gross income on the holidays, including gifts and travel.

Savings. Save 10 percent of your take-home pay. Some would say that should be on top of retirement savings.

Kids’ allowance. Give $1 weekly per grade in school. A fourth-grader gets $4.

Life insurance. Buy a policy worth six to 10 times your gross annual income.

Restaurant tipping. To quickly figure a generous tip, double the first digit on your bill. For bills more than $100, double the first two digits.

Emergency fund. Keep a rainy-day fund equal to three to six months of expenses.

Debt payment. Pay debts from highest interest rate to lowest. Or from the smallest amount to largest.

Mutual funds. Be wary of funds with an expense ratio of more than 1 percent.

College borrowing. Don’t borrow more money than you’ll make in your first year working after graduation.

Asset allocation. That’s how you should split your long-term investing between stocks and bonds. A conservative rule of thumb is 100 minus your age goes in stocks; the rest in bonds. More aggressive is a stock allocation of 110 minus your age.

Organic produce. If it has a thin skin that you eat, such as apples, spend extra for organic. If it has a thick skin that’s discarded — say, bananas — save your money. It’s about exterior pesticide residue.

Choose experiences. In a choice between spending on things or experiences with other people, choose the latter. Research shows it makes us happier.

Never:

  • Carry a credit card balance.

    Lend money to friends and family.

    Borrow from your 401(k) or cash out early.

    Pay fees on a checking account.

    Buy an extended warranty.

    Buy an investment you don’t understand.