The Ten Commandments Of Personal Finance

From The Retirement Manifesto

By  fritz@theretirementmanifesto.com

Is it possible that there are some basic principles upon which your personal finance journey should be built?  It turns out there are. I’ll warn you in advance – you may not like some of them. 

Just as THE Ten Commandments guide us away from our personal nature which is sometimes tempted to do things which seem fun at the time, but lead to long term harm, these “Personal Finance Commandments” can guide you away from doing things which will bring harm to your long term financial goals.

In full transparency, I didn’t come up with the original list.  That honor goes to this article from MoneyStepper, which I just read tonight.  I liked the concept and the guidelines presented so much,  I’ve decided to build on the original article with original thoughts of my own, including the “10 Commandments” title.

 In my quest to “Help People Achieve A Great Retirement”, I think there’s a lot of room to share some of the best concepts I come across in my heavy reading on personal finance topics.  This one’s a good one, and worth my effort to build upon the concept.

Strive to achieve as many of these commandments as you can, and you’ll be well on your way toward financial independence.  Break them, and suffer the consequences.

 The 10 Commandments Of Personal Finance

I.  Keep Your Housing Costs Under 25% of Your Net Income

Personally, I like these “rule of thumb” guidelines to help you decide how much of something you can afford.  When you’re shopping with a realtor, or talking to a banker, they often attempt to “stretch” you to a ratio that’s higher than you should really undertake.  So, look at your last paycheck. 

How much went into your bank account?  If you rent, your rent should be less than 25% of your monthly NET pay (after taxes).  Ditto on your mortgage payment.  If you’re spending more than the 25% “commandment”, consider downsizing, or seek out a job with higher pay.

II.  Keep Your Mortgage Under 2.5 Times Your Annual Salary

Interesting that the first two “Commandments” focus on housing costs.  Appropriate, given the cost of the roof over your head is the highest expense you’ll incur in your personal finance journey.  Manage it carefully, and don’t buy “too much” home.  If you’re making $50,000/year, your home should be worth $125k or less.

III.  Don’t Buy A New Car Unless You’re A Millionaire

I LOVE this one.  Bottom line:  buying a new car is stupid (yes, I said Stupid!).  It depreciates immediately, and it’s expensive. It’s one of the worst personal finance decisions you can make. Don’t “Buy New”! 

After a few months, it’s “just a car”.  Within a few years, if you’re like most people, you’re “itching” for another one.  AVOID the materialism – focus on the function.  My wife and I have bought used cars for years, and paid cash for all but our first one. 

We bought her last car new (a 2012 Hyundai Sonata for $25k), but I’ve told her she can’t sell it until it has over 200,000 miles on it.  Oh the fun we have on this topic.  Yes, this one is a HOT button for me. 

Don’t let Madison Avenue talk you into a mistake. Here’s a challenge for you, which I’ve accomplished with several of my cars:

“$1,000 PER YEAR”

Depreciation, that is.  Make it a personal goal.  Think on it.  If you buy a $20,000 car and sell it in 3 years, you’d have to sell it for $17,000 to achieve this goal. 

It can be done, I’ve done it twice (most recently with my 2002 Miata, which I bought for $12,000, and sold it 6 years later for $7,000).  It’s really, really hard, but it helps you keep your car expense where it should be – MINIMIZED!

IV.  Maintain A Savings Rate of 20% or More

To continue reading, please go to the original article here:

http://www.theretirementmanifesto.com/the-ten-commandments-of-personal-finance/