In the weekend’s linkfest, I point to an article in CNN Money: 25 Rules to Grow Rich By.
Aside from the poor grammatical construction of that headline, these are not rules to grow rich by, but rather, common sense money saving and investing tips. But the article’s biggest problem is that its a series of pages that requires 25 click throughs. Twenty-five! Blecch.
Allow me to save you some carpal tunnel syndrome: Below are the headlines of each page, with my annotations in italics. You can get all the details (and CTS) at CNN.
The abbreviated version:
1. For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second. (Living in the NorthEast, I have found any energy saving installation that pays off within 7 years to be well worth it — insulation, new burner/water heater, solar panels, new double pane windows, etc.);
2. It’s worth refinancing your mortgage when you can cut your interest rate by at least one point. (Note: half a point is also worthwhile if you are either pulling out equity, or if you are staying put for 7 years)
3. Spend no more than 2 1/2 times your income on a home. For a down payment, it’s best to come up with at least 20%.
4. Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.
5. Never hire a roofer, driveway paver or chimney sweep who is going door to door. (Also, always get references from any contractor)
6. All else being equal, the best place to invest is a 401(k). Once you’ve earned the full company match, max out a Roth IRA. Still have money to invest? Put more in your 401(k) or a traditional IRA.
7. To figure out what percentage of your money should be in stocks, subtract your age from 120. (this used to be 100 — I have no idea why this verasion has changed that number)
8. Invest no more than 10% of your portfolio in your company stock – or any single company’s stock, for that matter.
9. The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund.
10. Aim to build a retirement nest egg that is 25 times the annual investment income you need. (4% income? That’s very conservative, and assumes an ongoing low rate environment)
11. If you don’t understand how an investment works, don’t buy it.
12. If you’re not saving 10% of your salary, you aren’t saving enough. (easier said than done for middle class families)
13. Keep three months’ worth of living expenses in a bank savings account or a high-yield money-market fund for emergencies. If you have kids or rely on one income, make it six months’.
14. Aim to accumulate enough money to pay for a third of your kids’ college costs. You can borrow the rest or use some of your income to help out when your child is in college.
15. You need enough life insurance to replace at least five years of your salary – as much as 10 years if you have several young children or significant debts.
16. When you buy insurance, choose the highest deductible you can afford. It’s the easiest way to lower your premium.
17. The best credit card is a no-fee rewards card that you pay in full every month. But if you carry a balance, high-interest rates will wipe out the benefits.
18. The best way to improve your credit score is to pay bills on time and to borrow no more than 30% of your available credit.
19. Anyone who calls or e-mails you asking for your Social Security number or information about your bank or credit card account is a scam artist.
20. The best way to save money on a car is to buy a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.
21. Lease a new car or truck only if you plan to replace it within two or three years. (or if ytour business will pay for it — thats where leases originally developed)
22. Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower. (Version 2.0 is always better — true for software, even new models of cars are better off after the kinks hjave been worked out)
23. Buy airline tickets early because the cheapest fares are snapped up first. Most seats go on sale 11 months in advance.
24. Don’t redeem frequent flier miles unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles you spend.
25. When you shop for electronics, don’t pay for an extended warranty. One exception: It’s a laptop and the warranty is from the manufacturer.
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Source:
25 Rules to Grow Rich By
CNN Money
http://money.cnn.com/popups/2006/moneymag/25_rules/index.html
Follow these guidelines and feel confident that you’ll be making the right financial decisions.
spend no more than 2.5X your income? here in the Northeast? Hah! You’d have a better shot at spotting the Loch Ness Monster.
I have seen 110 mentioned as the # to subtract age from before (rather than 100) — the reason being people live longer and/or don’t start saving early enough–thus needing more aggressive growth.
My only beef is the no extended warranty. ALWAYS get the extended warranty (unless you plan on replacing within the reg warranty_. In my experience my electronics always die after the regular warranty has expired. Now, when something breaks I just take it back and get a new one.
Never get the warranty. In general never get insurance for something which you can afford to replace. Do you think the companies that underwrite these risks don’t know what they are doing?
On warranties: You really should look at buying the item either from CostCo or CostCo.com, as they offer generous warranty periods for no additional charge.
I like the rule on use of frequent flyer miles. My bogey has always been a penny a mile, and trigger point is over two cents a mile. Earning the points is only half the battle. Using them economically is the other half, and sometimes to more rewarding of the two.
I agree with Richard regarding “Spend no more than 2 1/2 times your income on a home. For a down payment, it’s best to come up with at least 20%.”
In California with reasonable middle class salary of $100K in high tech field, you would be
lucky to get a fixer upper for 250K. I am not even considering “hot areas” like Silicon Valley/San Diago.
Actually, here in rural Massachusetts, it would also be absurd to think you could get a house 2 1/2 times your income. In fact, in the little city I live in, 2 1/2 times the median income would barely get you a buildable lot.
When my father bought his first house in the 50s, I believe the rule was spend no more on a house than your annual income. Of course, they didn’t have advanced financial instruments like option ARMs in those days. ;-)
The 2.5x rule is absurd for people on the coasts, and in fact, housing in these areas is the best investment you can make, so you should do whatever it takes to own although now may not be the best time. It is always difficult to get in. It was 4x when I purchased but within a year it was below rental costs, in part for not having to pay tax on the gains of 25% down. Rents rise faster than incomes in these areas so if you plan to live there long term, you must buy or be forced out.
The rule for #10 – aim for 25x your retirement income for your nest egg – is designed to take inflation into account. 4% income after inflation is not nearly as conservative as it first appears – a money market would never make the grade. Sure, stocks have done 7% after inflation over the long haul (if I remember correctly), but there have been many periods where assuming that at retirement would wipe you out. 4% or at most 4.5% is a safe withdrawal rate for a retirement portfolio which is about 60% stock and 40% bonds.
The 2.5x rule is not absurd at all. Current house prices are. Many people are buying houses at 5x their income. How far do you think it will go? 10x? 20x? 100x? Eventually, house prices will fall back in line with incomes. Probably over the next 2-5 years. When it gets back below 2.5x your income, then buy. Until then, houses are overpriced.
On warranties: You really should look at buying the item either from CostCo or CostCo.com, as they offer generous warranty periods for no additional charge.
I read recently that BestBuy breaks even on merchandise and makes its money on the extended warranties. This sounds too good to be true, but the point remains that retailers would not offer to sell this sort of insurance to you if they weren’t making money on it.