money rules of thumb

Wednesday’s need-to-know money news

December 10, 2014 By Liz Weston

Today’s top story: How to budget when living paycheck to paycheck. Also in the news: Finding the best prepaid debit card, quick fixes that can hurt your finances, and ten good financial rules of thumb.

How to Budget When You Don’t Have a Steady Income
A budget is critical when living paycheck to paycheck.

How to Find the Best Prepaid Debit Cards
Pay close attention to hidden fees.

5 ‘Band-Aid’ Fixes That Hurt Your Finances
Beware the short-term fixes that could cause lasting damage.

10 Good Financial Rules of Thumb
Solid starting points.

Money rules of thumb: College savings edition

May 12, 2014 By Liz Weston

A college degree today is what a high school diploma was 60 years ago, a college consultant told me. Meaning: the bare minimum for staying in the middle class.

There will be exceptions, of course, but your kid is unlikely to be one of them. So here, in my ongoing “rules of thumb” series (previous editions include retirement and cars), are a few guidelines about saving for college:

So here, in my continuing “Rules of thumb” series, are three guidelines regarding cars: – See more at: http://asklizweston.com/page/3/#sthash.BwXsoYOC.dpuf

Save yourself first. No one’s going to lend you money for retirement, so that has to remain your top priority–hard as that is for parents to hear. Think of it this way: by saving for yourself first, you’re reducing the odds that you’ll have to move in with your kid in old age. Trust me, she’ll appreciate that someday.

But save something. Even if it’s just $25 or $50 a month to start, putting something away for college helps solidify it as a goal–and anything you can save will reduce your child’s future debt load (since most financial aid is actually loans, not grants or scholarships).

Use a good 529 plan. Money saved in 529s is tax free when used for college education costs, and most of these state-run plans are pretty good these days, thanks to better investment options and lower fees. Morningstar runs an annual list of the best and worst plans.

The more you make, the more you’re expected to save. Federal financial aid formulas aren’t adjusted for regional differences in cost of living. There’s no exception made for families that have experienced hard financial times in the past. The higher your income, the more the formula expects you will have saved…to the point where someone with an income over $100,000 could be expected to fork over a third of it for college costs. There are ways to reduce college costs, but knowing the reality of financial aid formulas will help you to understand the maxim that “if you CAN save for college, you probably SHOULD.”

Money rules rock

May 9, 2014 By Liz Weston

The more you learn about personal finance, the more you realize that “one size fits all” advice doesn’t really fit all. There are often too many exceptions, too many differences in upbringing, personality, culture, financial situations and goals to confidently say, “This is what everyone should do.”

Yet at the same time, people want clear direction. Give them too much information, and many just freeze up. Rather than do the wrong thing, they do nothing–which may be the worst thing of all.

So I was delighted to read about an MIT study that found rules of thumb helped small business owners more than teaching them accounting standards. The simple approach produced “economically meaningful improvements in business practices and outcomes,” according to “Keeping It Simple: Financial Literacy and Rules of Thumb.”

That gives me hope that the “money rules of thumb” pieces I write might actually help you get ahead. With that in mind, please click through to read my latest column for DailyWorth, “7 Money Rules You Need to Know.”

Money rules of thumb: car edition

April 22, 2014 By Liz Weston

Today for public radio’s Marketplace Money we talked to a guy who has a $600 a month car payment. It turns out he bought a car worth more than half his annual pay, and financed it over six years. (The segment airs this weekend, if you want to listen in.)

I no longer try to talk car guys out of their love affairs with wheels. But too often they’re prioritizing car payments over retirement savings and other more important goals.

So here, in my continuing “Rules of thumb” series, are three guidelines regarding cars:

Cars, Part I: “Buy used and drive it for at least 10 years.” I run through the numbers in my book “Deal with Your Debt”—you can save a quarter million dollars over your driving lifetime by holding on to cars for 10 years instead of trading them in every five years, assuming the cars cost about $20,000 each in today’s dollars and you finance them for five years. If you buy used and/or pay cash, you’ll save even more. Not only will you buy half as many cars, but you’ll avoid the 20% or so loss to depreciation that happens as soon as you get the keys. Today’s cars are better built and will last longer than ever before, so buying used isn’t the gamble it used to be.

Cars, Part II: “If you have to borrow, follow the 20/4/10 rule.” Make a 20% down payment so you’re not upside down as soon as you drive off the lot. Limit loans to four years and payments to no more than 10% of your income—less if you have other big debts or a fat house payment.

Cars, Part III: “The real cost to own is about twice the monthly payment.” If you’re trying to decide whether you can really afford the car the salesman is pitching, double the payment, since that’s roughly what you’ll pay for insurance, maintenance, repairs, depreciation and other costs averaged over five years. Some cars are much cheaper to own than others, obviously, but keeping the true cost in mind can help cool your ardor for a too-expensive ride. You can get more precise figures about how much a car will cost over five years by using Edmunds.com’s “True Cost to Own” calculators.