75 Personal Finance Rules of Thumb

A “rule of thumb” is a mental shortcut. It’s a heuristic. It’s not always true, but it’s usually true. It saves you time and brainpower. Rather than re-inventing the wheel for every money problem you face, personal finance rules of thumb let you apply wisdom from the past to reach quick solutions.

I’m going to do my best Buzzfeed impression today and give you a list of 75 personal finance rules of thumb. Some are efficient packets of advice while others are mathematical shortcuts to save brain space. Either way, I bet you’ll learn a thing or two—quickly—from this list.

The Basics

These basic personal finance rules of thumb apply to everybody. They’re simple and universal.

1. The Order of Operations (since this is one of the bedrocks of personal finance, I wrote a PDF explaining all the details. Since you’re a reader here, it’s free.)

2. Insurance protects wealth. It doesn’t build wealth.

3. Cash is good for current expenses and emergencies, but nothing more. Holding too much cash means you’re losing long-term value.

4. Time is money. Wealth is a measure of how much time your money can buy.

5. Set specific financial goals. Specific numbers, specific dates. Don’t put off for tomorrow what you can do today.

6. Keep an eye on your credit score. Check-in at least once a year.

7. Converting wages to salary: $1/per hour = $2000 per year.

8. Don’t mess with City Hall. Don’t cheat on your taxes.

9. You can afford anything. You can’t afford everything.

10. Money saved is money earned. When you look at your bottom line, saving a dollar has the equivalent effect as earning a dollar. Saving and earning are equally important.

Budgeting

I love budgeting, but not everyone is as zealous as me. Still, if you’re looking to budget (or even if you’re not), I think these budgeting rules of thumb are worth following.

11. You need a budget. The key to getting your financial life under control is making a budget and sticking to it. That is the first step for every financial decision.

12. The 50-30-20 rule of budgeting. After taxes, 50% of your money should cover needs, 30% should cover wants, and 20% should repay debts or invest.

13. Use “sinking funds” to save for rainy days. You know it’ll rain eventually.

14. Don’t mix savings and checking. One saves, the other spends.

15. Children cost about $10,000 per kid, per year. Family planning = financial planning.

16. Spend less than you earn. You might say, “Duh!” But if you’re not measuring your spending (e.g. with a budget), are you sure you meet this rule?

Investing & Retirement

Basic investing, in my opinion, is a ‘must know’ for future financial success. The following rules of thumb will help you dip your toe in those waters.

17. Don’t handpick stocks. Choose index funds instead. Very simple, very effective.

18. People who invest full-time are smarter than you. You can’t beat them.

19. The Rule of 72 (it’s doctor-approved). An investment annual growth rate multiplied by its doubling time equals (roughly) 72. A 4% investment will double in 18 years (4*18 = 72). A 12% investment will double in 6 years (12*6 = 72).

20. “Don’t do something, just sit there.” -Jack Bogle, on how bad it is to worry about your investments and act on those emotions.

21. Get the employer match. If your employer has a retirement program (e.g. 401k, pension), make sure you get all the free money you can.

22. Balance pre-tax and post-tax investments. It’s hard to know what tax rates will be like when you retire, so balancing between pre-tax and post-tax investing now will also keep your tax bill balanced later.

23. Keep costs low. Investing fees and expense ratios can eat up your profits. So keep those fees as low as possible.

24. Don’t touch your retirement money. It can be tempting to dip into long-term savings for an important current need. But fight that urge. You’ll thank yourself later.

25. Rebalancing should be part of your investing plan. Portfolios that start diversified can become concentrated some one asset does well and others do poorly. Rebalancing helps you rest your diversification and low er your risk.

26. The 4% Rule for retirement. Save enough money for retirement so that your first year of expenses equals 4% (or less) of your total nest egg.

27. Save for your retirement first, your kids’ college second. Retirees don’t get scholarships.

28. $1 invested in stocks today = $10 in 30 years.

29. Inflation is about 3% per year. If you want to be conservative, use 3.5% in your money math.

30. Stocks earn 7% per year, after adjusting for inflation.

31. Own your age in bonds. Or, own 120 minus your age in bonds. The heuristic used to be that a 30-year old should have a portfolio that’s 30% bonds, 40-year old 40% bonds, etc. More recently, the “120 minus your age” rule has become more prevalent. 30-year old should own 10% bonds, 40-year old 20% bonds, etc.

32. Don’t invest in the unknown. Or as Warren Buffett suggests, “Invest in what you know.”

Home & Auto

For many of you, home and car ownership contribute to your everyday finances. The following personal finance rules of thumb will be especially helpful for you.

33. Your house’s sticker price should be less than 3x your family’s combined income. Being “house poor”—or having too expensive of a house compared to your income—is one of the most common financial pitfalls. Avoid it if you can.

34. Broken appliance? Replace it if 1) the appliance is 8+ years old or 2) the repair would cost more than half of a new appliance.

35. Used car or new car? The cost difference isn’t what it used to be. The choice is even.

36. A car’s total lifetime cost is about 3x its sticker price. Choose wisely!

37. 20-4-10 rule of buying a vehicle. Put 20% of the vehicle down in cash, with a loan of 4 years or less, with a monthly payment that is less than 10% of your monthly income.

38. Re-financing a mortgage makes sense once interest rates drop by 1% (or more) from your current rate.

39. Don’t pre-pay your mortgage (unless your other bases are fully covered). Mortgages interest is deductible, and current interest rates are low. While pre-paying your mortgage saves you that little bit of interest, there’s likely a better use for you extra cash.

40. Set aside 1% of your home’s value each year for future maintenance and repairs.

41. The average car costs about 50 cents per mile over the course of its life.

42. Paying interest on a depreciating asset (e.g. a car) is losing twice.

43. Your main home isn’t an investment. You shouldn’t plan on both living in your house forever and selling it for profit. The logic doesn’t work.

44. Pay cash for cars, if you can. Paying interest on a car is a losing move.

45. If you’re buying a fixer-upper, consider the 70% rule to sort out worthy properties.

46. If you’re buying a rental property, the 1% rule easily evaluates if you’ll get a positive cash flow.

Spending & Debt

Do you spend money? (“What kind of question is that?”) Then these personal finance rules of thumb will apply to you.

47. Pay off your credit card every month.

48. In debt? Use psychology to help yourself. Consider the debt snowball or debt avalanche.

49. When making a purchase, consider cost-per-use.

50. Make your spending tangible with a ‘cash diet.’

51. Never pay full price. Shop around and do your research to get the best deals. You can earn cash back when you shop online, score a discount with a coupon code, or a voucher for free shipping.

52. Buying experiences makes you happier than buying things.

53. Shop by yourself. Peer pressure increases spending.

54. Shop with a list, and stick to it. Stores are designed to pull you into purchases you weren’t expecting.

55. Spend on the person you are, not the person you want to be. I love cooking, but I can’t justify $1000 of professional-grade kitchenware.

56. The bigger the purchase, the more time it deserves. Organic vs. normal peanut butter? Don’t spend 10 minutes thinking about it. $100K on a timeshare? Don’t pull the trigger when you’re three margaritas deep.

57. Use less than 30% of your available credit. Credit usage plays a major role in your credit score. Consistently maxing out your credit hurts your credit score. Aim to keep your usage low (paying off every month, preferably).

58. Unexpected windfall? Use 5% or less to treat yourself, but use the rest wisely (e.g. invest for later).

59. Aim to keep your student loans less than one year’s salary in your field.

The Mental Side of Personal Finance

At the end of the day, you are what you do. Psychology and behavior play an essential role in personal finance. That’s why these behavioral rules of thumb are vital.

60. Consider peace of mind. Paying off your mortgage isn’t always the optimum use of extra money. But the peace of mind that comes with eliminating debt—it’s huge.

61. Small habits build up to big impacts. It feels like a baby step now, but give yourself time.

62. Give your brain some time. Humans might rule the animal kingdom, but it doesn’t mean we aren’t impulsive. Give your brain some time to think before making big financial decisions.

63. The 30 Day Rule. Wait 30 days before you make a purchase of a “want” above a certain dollar amount. If you still want it after waiting and you can afford it, then buy it.  

64. Pay yourself first. Put money away (into savings or investment accounts) before you ever have a chance to spend it.

65. As a family, don’t fall into the two-income trap. If you can, try to support your lifestyle off of only one income. Should one spouse lose their job, the family finances will still be stable.

66. Every dollar counts. Money is fungible. There are plenty of ways to supplement your income stream.

67. Savor what you have before buying new stuff. Consider the fulfillment curve.

68. Negotiating your salary can be one of the most important financial moves you make. Increasing your income might be more important than anything else on this list.

69. Direct deposit is the nudge you need. If you don’t see your paycheck, you’re less likely to spend it.

70. Don’t let comparison steal your joy. Instead, use comparisons to set goals. (net worth).

71. Learning is earning. Education is 5x more impactful to work-life earnings than other demographics.

72. If you wouldn’t pay in cash, then don’t pay in credit. Swiping a credit card feels so easy compared to handing over a stack of cash. Don’t let your brain fool itself.

73. Envision a leaky bucket. Water leaking from the bottom is just as consequential as water entering the top. We often ignore financial leaks (e.g. fees), since they’re not as glamorous—but we shouldn’t.

74. Forget the Joneses. Use comparisons to motivate healthier habits, not useless spending.

75. Talk about money! I know it’s sometimes frowned upon (like politics or religion), but you can learn a ton from talking to your peers about money. Unsure where to start? You can talk to me!

The Last Personal Finance Rule of Thumb

Last but not least, an investment in knowledge pays the best interest.

Boom! Got ’em again! Ben Franklin streaks in for another meta appearance. Thanks Ben!

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

Source: bestinterest.blog

How to Maximize Your Tax Return for a Bigger Refund

Note: Due to the COVID-19 coronavirus pandemic, the IRS has extended the federal tax filing and payment deadline to July 15, 2020. The recent relief package passed by Congress may have additional tax implications. Please contact a tax adviser for information you may need to complete your taxes this year. Learn more.

It’s finally spring—cue the flowers, warm weather and all-around greenery. And tax season. Sure, you could get a nice tax refund. Or you could put all that work into your taxes and get barely anything.

Luckily for you, we’ve got a few tips on how to maximize your tax return. We want to make sure that you avoid mistakes on your taxes. If you don’t you might end up paying even moretaxes than you have to or under-reporting your income and paying interest and penalties later.

We don’t want that to happen. This year, follow these easy ways that can help you maximize your tax return.

1. Don’t Leave Money on the Table

If you forget to use all of your Flexible Spending Account (FSA) dollars or don’t make contributions to your individual retirement and 529 accounts, you could leave money on the table. You have until December 31 to use money in your FSA or contribute to a 529 account. Some states even allow deductions for 529 contributions.

You can also make contributions to your traditional and Roth IRAs for the 2019 tax year has been extended to July 15, 2020.  For the 2019 tax year, you can contribute a total of $6,000 to IRAs.

Wondering how you can maximize your 2020 refund? If you’re ready to start working on maximizing your return for next year, consider how much you can contribute to retirement plans in 2020. You can contribute up to $19,500 to 401(k) plans.

Choosing to not file a return because your income for 2019 might also mean you’re leaving money on the table. Just because your income doesn’t require you to file doesn’t mean you’re not due a refund. And if you’re eligible for a refund, you have to file a return to get it. In 2018, the IRS reported it had $1.1 billion of unclaimed refunds from an estimated 1 million taxpayers who didn’t file in 2014 alone.

2. Claim All Available Deductions, Including Charitable Contributions

Dig into all deductions available to you. Some of the more common deductions include charitable donations, medical costs, prepaid interest on a mortgage and education expenses. Deductions are subtracted from your adjusted gross income, which lowers your actual taxable income.

Your taxable income is the amount you pay taxes on. The lower your taxable income, the less tax you pay and the higher refund you might receive.

If you’re charitably inclined and itemize your deductions, you can maximize your return by taking advantage of donations in all forms—cash and goods. That means you can claim the value of those clothes donated to a local church drive, for example.

Be sure to keep good records and receipts. Also, make sure that you’re only claiming deductions for organizations that have tax-exempt status with the IRS.

3. Use the Best Filing Status

What’s your best filing status? If you have a tax preparer, make sure you update them on any life changes you’ve had, such as getting married or divorced. Your relationship status on December 31 determines your filing status for the entire year and is the one you need to use when filing that year’s tax return. Options include:

  • Single
  • Head of household
  • Married, filing jointly
  • Married, filing separately
  • Qualifying widower

Whether or not you can file head of household, which comes with some tax benefits, is one of the more confusing questions. To file as a head of household, you must:

  • Be unmarried or considered unmarried on Dec. 31 of the relevant tax year
  • Paid more than half of the costs associated with keeping and maintaining your home during the tax year
  • Have a qualifying person, such as a child or other dependent, living with you for at least half the year

If you could technically file with two different statuses—like if you could file single and head of household—you might try calculating your taxes with both to find out which is in your best interest. This could mean checking to see if your refund changes whether you file as single or head of household or whether you file as married jointly or separately. Just don’t actually file your taxes until you make a decision, as you can only file once.

4. Report All Your Income

Some people fail to report all their income on their return. This oversight—intentional or not—can cost you. If you have unreported income and the IRS uncovers it, you’re looking at interest and penalties for unpaid taxes.

Sadly, you won’t get a free pass when you make an honest mistake. So spend a few extra minutes reviewing your return. Think through the year and your accounts to make sure you don’t forget any income sources. It’s often 1099 income that’s overlooked—things like contract work, interest income and dividends.

It can be helpful to keep a spreadsheet of all of your tax information—including sources of income, 1099s, charitable gifts and IRA and 529 contributions. Update it each year to help avoid missing things during tax prep. You’re less likely to forget about a 1099 if it’s listed in your prior year’s tax information.

5. Meet the Deadlines

Your 2019 federal tax return must be electronically filed or postmarked by July 15, 2020. The only exception is if you file an extension, which must be filed or postmarked by that date. An extension buys you through mid-October to file your return without penalties. However, you will still owe interest for any tax that was owed by July 15 and not paid.

What Happens if You Don’t File Your Tax Return on Time?

The IRS charges a number of penalties, including one for failing to file in a timely manner. It equates to 5% of your unpaid taxes and is charged for each month your return is late up to five months. And if you file more than 60 days late, you can be hit with a minimum penalty amount if even if you don’t owe any taxes.

If you don’t pay your taxes on time, the IRS charges penalties and interest on it. The total amount you might end up owing depends on how much tax you owe and how long it’s outstanding.

6. Check Your Math

It sounds a little obvious, but year after year, math or number errors are among the most common mistakes. When you’re filling out your tax forms, go slowly and double-check your numbers and math. A lot of mathematical errors can be avoided if you’re using tax software that does the calculating for you. If you find the entire process daunting, consider working with a tax preparer or accountant to help reduce these types of errors.

7. Check Your Bank Account Details

If you plan to use direct deposit to receive your refund, double check the bank account information you provide. If you enter the wrong account information, you won’t receive your refund as you planned. And getting things straightened out can be a pain.

If You Have to Refile a Tax Return

If you find you made a mistake after filing your tax return, make the necessary corrections as soon as possible. You need to file an amended return if you made mistakes regarding your filing status, dependents, income, deductions or credits. Form 1040X is used to file the corrected return, and it has to be done on paper rather than digitally. Amended returns must be filed within three years of the original filing date or two years from the point you paid any taxes owed for that tax year.

For more information about filing your taxes or to find answers to other common tax questions, check out the Tax Learning Center.

The post How to Maximize Your Tax Return for a Bigger Refund appeared first on Credit.com.

Source: credit.com