The best personal finance advice is tailored to your individual situation. That said, a few rules of thumb can eliminate the confusion that often surrounds money decisions and help you build a solid financial foundation.
The following guidelines for saving, borrowing, spending, and protecting your money are drawn from nearly three decades of writing about personal finance.
1. PRIORITIZE SAVING FOR RETIREMENT
In an ideal world, you’d start saving with your first paycheck and continue until you’re ready to retire. He, too, would not touch that money until retirement. Even if he can’t save 15% of his pre-tax income for retirement, as Fidelity and other financial services companies recommend, anything he saves can help him have a more comfortable future. Try to make the most of any company match you get from a 401(k) at work (that’s free money), and only borrow or withdraw retirement funds as a last resort.
2. SAVE FOR A RAINY DAY
You may have read that you need an emergency fund equal to three to six months of expenses, but saving that much can take years. That’s too long to put off other priorities, like saving for retirement. A $500 emergency start-up fund can be your first goal and then you can add to it. While you’re saving, try building other sources of emergency cash, like a Roth IRA (you can withdraw your contributions anytime without taxes or penalties), room on your credit cards, or an unused home equity line of credit.
3. SAVE FOR COLLEGE
Have children? Open a 529 college savings plan and contribute at least the minimum, which is typically $15 to $25 a month. Retirement savings come first, but anything you can save will reduce the amount your child may need to borrow. In addition, research shows that simply saving for college increases a child from a low- to moderate-income family’s chances of attending college.
4. ASK FOR A SMART LOAN FOR COLLEGE
A college degree can lead to higher earnings, but lenders may allow you to borrow much more than you can comfortably repay. If you’re borrowing for your own education, consider limiting your total debt to what you expect to earn in your first year out of school. If you’re a parent borrowing for a child’s education, aim for payments that are no more than 10% of your after-tax income and still allow you to save for retirement. If your payments are more than 10% of your after-tax income, investigate income-based payment plans that could lower your costs.
5. USE CREDIT CARDS AS A CONVENIENCE
Credit cards offer convenience and can protect you from fraud and merchant disputes. But credit card interest tends to be high, so don’t run up credit card balances if you can help it. If you routinely pay your balances in full, look for a rewards card with a sign-up bonus that pays back at least 1.5% of what you spend.
6. FINANCING YOUR HOUSE SMARTLY
If you want to own a home, the best time to buy your first home is when you’re financially ready and able to stay for a few years. Opt for a mortgage rate that is fixed for as long as you plan to stay in the home and make no additional payments against the principal until you’ve paid off all other debts and are on track for retirement.
7. BUY USED VEHICLES AND DRIVE THEM FOR YEARS
Buying a car right now is not a great idea; Supply chain issues and other issues related to the pandemic have inflated the cost of new and used cars. Overall though, buying a used car can save you a ton of money over your lifetime as a driver, as can driving your car for many years before replacing it. These days, a well-maintained car can last 200,000 miles without major problems, according to JD Power. This means that you can get approximately 13 years of service from your car if you drive it 15,000 miles a year. Ideally, you would pay cash for cars. If you need to borrow, try to limit the term of your loan to a maximum of five years.
8. INSURANCE AGAINST CATASTROPHIC EXPENSES
Use insurance to protect yourself against catastrophic expenses instead of smaller costs that you can easily pay out of pocket. If you have enough savings, consider raising your policy deductibles to save money on premiums. However, beware of high deductible health insurance policies. Having a high deductible could cause you to put off medical care, and it’s best to err on the side of safety when it comes to health.
This column was provided to The Associated Press by the personal finance site NerdWallet. The content is for educational and informational purposes and does not constitute investment advice. Liz Weston is a columnist for NerdWallet, a certified financial planner, and the author of “Your Credit Score.” Email: firstname.lastname@example.org. Twitter: @lizweston.
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