Rules to Grow Rich By - Planning Tips - Money Magazine at Catch a Gideon

December 2nd, 2006 by digerati

12. If you’re not saving 10% of your salary, you aren’t saving enough. Saving 10% can be difficult for people with little education, making minimum wage, and living in a high expense area. Some people will need to save much more than 10%, particularly if they started saving later in life and are trying to catch up before retirement. For those extremes, 10% is not appropriate. But for others, it’s a decent starting point. Of course, the more you can put away rather than spend, the better.

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’. Creating an Emergency Fund is usually the first step once one decides to get financially in gear. Everyone will experience some kind of emergency eventually, so it’s good to have cash stashed. This way, there is no need to rely on credit card or emergency 401(k) loans to help.

One way to painlessly create an Emergency Fund is to handle the deposits automatically.

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. First things first: make sure you are set before you save for your kids’ education. That is the approach that most financial planners suggest.

I’m not quite sure I agree due to the strong emphasis I place on quality education and my belief that too many “real world” jobs can distract students from focusing on school when their brains are the most impressionable for higher-level learning (high school and college). Parents should provide as much financial support for college as practical.

Tuition prices are only increasing, and doing so at a rate much higher than “official” inflation. A high debt burden when exiting college can dissuade students from taking on degree programs that are not predicted to be the most lucrative. It’s important that there continue to be people in the world studying and becoming experts in literature, art, music, education, history and social sciences.

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. I have no life insurance. There’s no one depending on my salary other than myself at this time. Thus, life insurance hasn’t been on my list yet. This rule of thumb sounds good to me, but if anyone has any thoughts on life insurance to share, please feel free to educate me by leaving comments below.

16. When you buy insurance, choose the highest deductible you can afford. It’s the easiest way to lower your premium. You shouldn’t have to go into debt to pay a deductible, so you need to be prepared to pay what is necessary by tapping only your savings.

I do this buy setting aside extra money each paycheck to keep a savings account specifically for car emergencies until it’s funded up to the deductible. This is coming in handy at the moment, thanks to my recent accident.

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. If you need to carry a balance, get a card with the lowest APR, and keep it low. If you don’t carry a balance, get a card with the best rewards that suit your spending or traveling habits. There’s no one “best card” because everyone’s needs are different.

I still use my Citi Platinum Dividend Select for the cash back. I’ll hit my yearly rebate limit soon, so I’ll be switching to another rebate card for the rest of the year. The only reason reward cards work for me is because I pay the balance off every month.

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. It’s hard to determine the exact ratio that credit card companies like to see. The algorithm to generate an official credit score is proprietary, and Fair Isaac Co. doesn’t just give away their secrets.

Due to this, the credit reporting agencies have started building their own calculations, and I predict we’ll see increasingly differing formulas depending on who is looking at your credit. Good habits, like paying bills on time, are hard to argue with. The theory of using not more than 30% of available credit is more of a guess. Some credit cards don’t report the full amount of available credit to the agencies, and there’s very little you can do.

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. It’s easy to say that this falls under the “common sense” category, but scammers are good at convincing people they are legitimately working for who they say they are. Always ask for a number to call back if a bank or credit card company calls. Verify the number or call the bank’s official number and try to reach someone else in the department who could validate the issue.