6 rules for saving, borrowing and
Author: Liz Weston
The best personal finance advice is tailored to your individual situation. That said, a few rules of thumb can cut through 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 culled 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 keep going until you’re ready to retire. You also wouldn’t touch that money until retirement. Even if you can’t save 15% of your pre-tax income for retirement, as recommended by Fidelity and other financial services firms, anything you put aside can help give you a more comfortable future.
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 it can take years to save that much. That’s too long to put off other priorities, like saving for retirement. A starter emergency fund of $500 can be your first goal, and then you can build it up. While you’re saving, try to create other sources of emergency cash, space on your credit cards or an unused home equity line of credit.
3. Use credit cards as a convenience
Credit cards offer convenience and can protect you from fraud and disputes with merchants. But credit card interest tends to be high, so don’t carry credit card balances if you can avoid it. If you routinely pay your balances in full, look for a rewards card with a sign-up bonus that returns at least 1.5% of what you spend.
4. Finance your home smartly
If you want to be a homeowner, the best time to buy your first home is when you’re financially ready and in a position to stay put for a few years. Opt for a mortgage rate that’s fixed for as long as you plan to remain in the home, and don’t make extra payments against the principal until you’ve paid off all other debt and are on track for retirement.
5. Buy used vehicles and drive them for years
Buying a car right now isn’t a great idea; supply-chain kinks and other pandemic-related issues have inflated the cost of both new and used cars. In general, though, buying a used car can save you a ton of money over your driving lifetime, as can driving your car for many years before replacing it. These days, a well-maintained car can last 200,000 miles without major issues, according to J.D. Power. This means you can get roughly 13 years of service out of 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.
6. Insure against catastrophic expenses
Use insurance to protect yourself against catastrophic expenses rather than smaller costs that you can easily pay out of pocket. If you have sufficient savings, consider raising the deductibles on your policies to save money on premiums. Be careful about high-deductible health insurance policies, though. Having a high deductible could cause you to put off medical care, and it’s better to err on the side of safety when it comes to health.