Financial Rules of Thumb

There are a number of financial rules of thumb used by so-called experts. However, many of these rules are a mile long and require a CPA to decipher their hidden meaning. In this article, we are going to provide you with three simple financial rules of thumb that will guarantee you and your family's financial freedom.

Mortgage Payment

In light of the current mortgage crisis, we felt the need to list this rule first. While many people look at their mortgage as an investment, it can also play the duel rule of destructor. This switch from friend to foe is often a result of poor financial planning. In order to keep your mortgage in the friend column potential borrowers should only take on a payment that represents 30% of their monthly income. For example, a family whose income is $4,000 per month could have a maximum mortgage payment of $1,200 per month. The mortgage payment rule of thumb is generally the toughest to swallow as people's expectations of what house they can afford is often greatly exaggerated.

Debt

Far too often we all fall victim to debt. Debt can appear to creep out of nowhere and become a permanent fixture in your life. Well, this next rule will help you wipe debt away once and for all. Take all of your outstanding balances (excluding your mortgage) and add them up. These debts include your student loans, car note, credit cards, time-shares, etc. This grand total should be less than 20% of what you make annually. Therefore, if a family makes $100,000 a year, the maximum they should have in outstanding debt is $20,000. I know this sounds hard, well that is because it is tough. With a solid plan, anyone can achieve this sort of financial success within 5 to 10 years.

Savings

Like this article, many people place savings as the last thing on their to do list. Well I am here to tell you that without any savings you have very little to stand on. In order to assure your family's well being, you must save a minimum of 10% of your salary per month. In order to do this, you must pay yourself first. Once you begin to pay yourself first, instead of cutting out your savings, you will find yourself cutting expenses in order to meet your financial goals. By following these 3 simple financial rules of thumb, a person will be able to live life above the painful cycle of debt.