16 GREAT money rules

Source: Liz Pulliam Weston of msn.com

This is a great article from Liz Weston. I like it.

1) Retirement: Save 10% for retirement, 15% for more comfort, 20% to early retirement.

This rule of thumb works pretty well if you start to save for retirement by your early 30s. Saving at least 10% of your income ensures you will have a retirement. 15% should get you a more comfortable retirement, while 20% gives you a shot at an early retirement.

However, if you wait till you're in 40s to start, though, and you'll need 15% for retirement and 20% for comfort; an early retirement may not be possible.

2) Retirement: Retirement money is for retirement; until then, don't touch them.

3) Student loans: Your total borrowing shouldn't exceed what you expect to make your first year out of school.

The borrowings include student loans and credit card debts.

4) College savings: Saving for retirement is more important, but try to put at least $25 a month per kid in a college savings plan.

But contributing even a small amount each month will help reduce the amount of debt your child eventually incurs.

5) Cars: Buy used and drive it for at least 10 years.

6) Cars: If you must borrow to buy a car, follow the 20/4/10 rule.

Which means: Make a 20% down payment, don't borrow for more than four years and don't agree to a monthly payment that's more than 10% of your income -- or 8% if you plan to buy a home in the next few years.

7) Cars: To compute and compare the real monthly cost to buy, insure and operate a car, divide by 30.

You can get more precise figures about how much a car will cost over five years by using Edmunds.com's "True Cost to Own" calculator. But this rule of thumb will help you determine if that car you think is affordable actually will be once all costs are factored in.

8) Credit cards: If you carry a balance, look for the lowest rate. If you don't, get rewards at least equal to 1.5% of what you spend.

9) Debt repayment: Pay off maxed-out cards first.

You should first tackle any card that's close to its limit, since maxing out cards hurts your credit scores and can trigger penalty rates and fees.

10) Financial flexibility: You need to be able to get your hands on cash or credit equal to three months' worth of expenses.

Ideally, everybody would have at least three months' worth of expenses saved up in cash to serve as a cushion against job loss or other disasters. But saving that much money can take a while and many families have more important priorities to address first.

Still, save a small amount for emergency. If you have a house, an unused home equity line of credit also can be used as stand-ins for a real emergency fund until you can get around to save the cash.

11) Insurance: Cover yourself for catastrophic expenses, not the stuff you can cover out of pocket.

Insurance isn't meant to cover the normal expenses of daily living. It is designed to bail you out when you face expenses so big they might otherwise wipe you out financially. That's why you want high limits on your policies -- but high deductibles, too.

12) Life insurance: Those who need it typically need five to 10 times their income.

Most people need to answer only two questions about insurance: "Do I need it?" and, if the answer is yes, "How much do I need?"

Term or "pure" insurance is usually the way to go, since insurance that includes an investment component can busting most families' budgets.

13) Mortgages: If you can't afford to buy the house using a 30-year fixed-rate mortgage, you can't afford the house.

14) Mortgages: Fix the rate for at least as long as you plan to be in the home.

15) Mortgages: You almost certainly have better things to do with your money than prepay a low-rate, deductible mortgage.

Don't consider prepaying your mortgage until you're taking full advantage of your retirement savings options and have paid off all your other debt.

16) Priorities: Retirement, then credit cards, then emergency fund.

Your highest priority should be saving for retirement, since every dollar you fail to save today could cost you $10 or more in lost retirement income. Also, opportunities to get a 401(k) match or to fund an IRA or Roth IRA are "use it or lose it" propositions.

Paying off credit card debt should be your next highest priority, since it's probably accumulating at double-digit interest rates and reducing your financial flexibility.

Finally, an emergency fund equal to three to six months' worth of living expenses can protect us from financial ruin caused by job loss, disability, illness, accidents, or natural disasters.

Having a pile of cash in a high-rate savings account can also do wonders for reducing your money anxieties.