5 Money Rules from Liz Weston

May 28, 2009

Liz Weston helped mentor the participants in the FNBO Direct Pay Yourself First challenge as they saved money for the trip of a lifetime, to buy a house, pay off college loans, to have a baby, and save for nursing school.  Although these are all different goals, as I read through the advice that Liz offered each person I saw a trend.  Here’s the next question I had for Liz about what I saw.

Looking through your suggestions for the participants in the FNBO PYF Challenge I noticed a lot of times you provided them with metrics to help them make their decisions or set their goals.  For example:

Budgeting

  • 50% of after tax income – limit basic expenses to no more than this (includes shelter, food, insurance, transportation, etc)
  • 20% for savings (includes retirement & emergency fund)
  • 30% for wants (clothes, vacations, dinners out)

Student Loans

  • 10% of expected monthly gross income, student loan payment shouldn’t exceed this
  • 2/3 first year’s salary, limit total borrowing to no more than this

I think having these numbers to guide decisions and goals makes it much easier to put good money management practices into place.  What would you say are the 5 most important money metrics that people should stick to?

Here is what Liz had to say:

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I agree—people really seem to appreciate having these benchmarks. The most important are:

1. Keep must-have expenses to 50% of after-tax income. This gives you room to save, pay down debt and still have money for fun, but too many people “overspend on their overhead” and wind up struggling. Also, limiting the essentials to half your income allows you to get through a tough time such as a layoff much more easily than if you’ve committed to higher spending.

2. Don’t borrow more for your education than you expect to make your first year out of school. There are exceptions to this rule, of course, but it ties debt to expected reward, while making sure you don’t overdose.

3. 20/4/10. When it comes to car loans, put at least 20% down, limit the loan to no more than 4 years and the payment to no more than 10% of your gross income. This will keep you from overspending on a car and from being upside down on your loan.

4. For retirement: save 10% of your income to cover the basics, 15% if you want more creature comforts, 20% if you want to retire early. (Boiled down, that’s 10% for basics, 15% for comfort, 20% for freedom.) These percentages work if you start saving by your early 30s. If you wait much longer, you have to crank up the percentages to get the same results.

5. Pay 100% of your credit card bills 100% of the time.

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Thanks to Liz for sharing those simple money metrics to help us measure how we’re doing with our money!  Tomorrow we’ll take a look at some credit score tips based on the changing credit environment in our economy.

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Ben

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Ben
Ben Edwards, the founder of Money Smart Life, saved up enough to buy a Nintendo back when he was 12 years old. When he used the money to buy shares of Wal-Mart stock instead, he knew he wasn't like the other kids... His addiction to personal finance has paid off for his family and now he's helping you to afford the life that you want. Check him out on the web at Google Plus, Twitter and Facebook.

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3 Responses to 5 Money Rules from Liz Weston

  • Rajeev SIngh

    I think these 5 rules are the key to a person’s financial independence. I would also like to add up the importance of having a decent “Emergency fund” to back up this considering the uncertain times we live in especially o job front.

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