My favorite personal finance rules of thumb

This is another article that will always be a work in progress. I am constantly looking to learn new ways to better myself and my financial independence, so when I hear of new ideas I will add them to this page. It's important to remember that these rules are simple guidelines that do not fit every situation and you must frame each of these in the context of your own life—if you have specific questions, give me a shout.


Always keep a cushion of 6 months of living expenses in cash.
This is your safety net if the worst should happen: you or your spouse loses a job, a recession hits, a market downturn, whatever. Be smart about this. If you think it would take longer than 6 months to get back on your feet, keep a cushion of more than 6 months. But don't get too excessive either; by holding too much cash you could be missing out on long term returns from investments.


Keep your rent or mortgage payment below 1/3 of your monthly take-home pay.
Do not treat this like a target! This is an upper limit, and your goal should be to go even lower than 1/3.


Maintain a budget to keep an eye on your spending
It is very easy to let your spending slip when you aren't keeping a close eye on it. Don't get me wrong--I am not saying you should have hard cut-offs and be overly strict with yourself. Most people would get frustrated and give up altogether if they were to do that. Instead, use a dashboard tracker and make a plan for how much you want to spend on various categories.


Save 10% of your income for retirement
This does not necessarily need to be in your 401k. But putting a number on a savings target can be a helpful tool. I aim to save around 50% of my after-tax income, which comes out to approximately 30% of my gross income. Most of this goes into my various investment accounts, because I value my own flexibility, and I trust myself to invest my extra savings, rather than to spend them.


Buy a used car and drive it for at least 10 years
A new car depreciates in value immediately after taking it off the lot (alas, the new car smell alone doesn't prop up the value). There is no reason a good quality used car couldn't last over 10 years, assuming you put in the proper maintenance. But also consider: do you even need a car?


Never carry a balance month to month on a credit card
Carrying a balance has two downsides: (1) it hurts your credit score, and (2) most credit cards have astonishingly high interest rates. But if you have to carry a balance, be smart with choosing a credit card. Get a credit card with a low interest rate so that you minimize the interest you are paying. Know your spending habits and tendencies. Or if you know you have difficulty controlling your spending, consider getting a charge card that requires you to pay off the full balance every month.


Don't make early payments on a low-rate mortgage
There are much better uses of your money! Mortgage rates have been at historical lows since the financial crisis nearly a decade ago, plus the interest payments are tax deductible. Most other debt (student loans, credit card debt, etc.) comes with a higher interest rate. You should focus on paying off those loans first.

Always remember to frame these rules in the context of your life. Are you interested in a practical guide to setting up basic personal finance tools? Take a look at my Step by step beginner's guide.