2020 will most certainly leave us with a lot of lessons — particularly in the wake of the COVID-19 pandemic.
While this article isn’t about the actual impact of the pandemic, the reality is that thanks to the pandemic and the resulting recession in most parts of the world, the finances of a lot of people has been significantly affected.
While a pandemic the scale of COVID-19 (and its prolonged financial consequences) wasn’t anticipated, the reality is that there are personal finance rules you can live by to protect your finances from pretty much any eventuality — even COVID-19.
It’s still not too late to starting living by these rules:
1. Save a Portion of Every Income Using the 50/30/20 Rule
“Not earning enough money” isn’t really an excuse not to save.
Things are indeed tight for a lot of people, and your income is most likely barely sufficient to meet your needs. Notwithstanding, you have to pay taxes because it’s something you absolutely have to do. Applying the same mindset to savings will help you a great deal; see saving a portion of your income as a “tax” collected by your future self, and that you absolutely have to pay for the greater good.
So how many percent of your income should you save?
A good saving rule you should embrace is the 50/30/20 rule:
Basically, the rule states that a maximum of 50 percent of your income should go towards necessities, 30 percent should go towards discretionary items, and a minimum of 20 percent should be saved.
This rule will be difficult to follow if you don’t have a savings habit before, but following it can basically save your life and that of your loved ones in the near or long future.
2. Don’t Spend More than 10 Percent of Your Income on a Vehicle
If there’s one finance lesson you can learn from some of the world’s most eccentric billionaires, it is that they spend frugally on cars:
- Warren Buffet is renowned for driving a Cadillac XTS that retails for around $45,000.
- Mark Zuckerberg is renowned for driving a black Acura TSX that is valued around $30,000.
- And Wal-Mart heiress Alice Walton (and one of the wealthiest women in the world) reportedly drives a 2006 Ford F-150 King Ranch valued around $40,000.
While it can be argued that the above-listed billionaires drive these cars because that’s their personal preference, the reality is that every billionaire knows that a car is a depreciating asset. In other words, it progressively becomes less valuable than it was at the time of purchase — and it very rarely brings in income.
Of course, you have to own a vehicle. So what do you do?
Follow the 1/10th rule for car buying:
According to this rule, you shouldn’t spend more than 10 percent of your annual income on a car purchase.
It’s difficult to stomach driving a much cheaper car when everyone in the neighborhood is driving a car worth ten times more than yours, but what’s the point of driving a car you can’t maintain?
3. The 20/10 Rule of Credit
In a world where you’re being constantly pressured to borrow, it can be difficult to know exactly when to stop.
Following the 20/10 rule of credit will save you, however.
This rule states that your credit card debt should not exceed 20 percent of your total annual income after taxes and that you should not have more than 10 percent of monthly income in credit card payments.
Not only does this rule prevent you from swimming in debt, but it actually helps your credit score. According to a useful source, most lending services would want you to have a good credit score (often above 680) before giving you credit — and following the 20/10 rule helps ensure your credit score is intact.
4. Have an Emergency Fund
COVID-19 is a good reminder of why it’s good to have an emergency fund.
In developed countries, citizens are lucky and have their government giving out stimulus packages and checks to ensure that they are at least able to meet basic needs. Even with that, these packages don’t always come in on time. In developing and underdeveloped countries, citizens are lucky if they get any form of financial aid.
It is situations like this that emergency funds are dedicated to.
Emergency funds can also come in handy in several other emergency situations: an health emergency, a sudden job loss, or some other unanticipated crisis that you have to respond to urgently.
5. Don’t Spend More than 30 Percent of Your Income on Housing
So how much of your income should you spend on your house?
While this can be a very emotional question, considering the fact that owning a house is a key part of the American dream for many, the reality is that homeownership isn’t something you should go into debt to achieve.
The majority of financial experts agree that you should not spend more than 30 percent of your income on housing.
While pretty much everyone wants to be a homeowner, it won’t be a good idea to go into debt to purchase a home or to go way above your budget to purchase a home to the detriment of every other expense.
Rent if you have to, but don’t ever spend more than 30 percent of your income on housing.