7 simple rules that will make you better with money immediately by Jim Wang on Feb 27, 2018, 9:58 AM Advertisement
 - Like baking a cake, saving money is easier when simple ratios are applied to financial decisions.
- Housing should cost about 30% of your monthly take home pay and a mortgage should be no more than 2.5 times your yearly income.
- These ratios should be used as guidelines and not hard set rules, like subtracting your age from 120 to find how much of your investments should be in stocks.
Ratios are everywhere. Have you ever baked a loaf of bread? The recipe always looks complex but it relies on one key ratio: five parts flour to three parts liquid. Fresh pasta is just three parts flour and two parts egg. These ratios are important because if you can't remember the specific recipes, a ratio will save the day. The same can be true of money ratios. These aren't naturally occurring ratios, like the golden ratio, but man-made rules of thumb that can be extremely valuable starting points. SEE ALSO: Knowing that you make less money than your colleagues can lead to serious health consequences DON'T MISS: Building wealth starts with out-thinking your emotions — here are 5 mental traps standing in your way 1. 20-30-50 — budgeting ratio The budgeting ratio says (the order is important): - 20% should be immediately saved (goals or retirement) or put towards paying down debt.
- 30% should be the maximum you spend on housing.
- 50% should be spent on everything else.
If your take-home pay is $5,000 a month, you should aim to: - Put at least $1,000 towards your retirement accounts, emergency fund, or your debts.
- Pay no more than $1,500 a month in rent or a mortgage.
- Pay no more than $2,500 for everything else.
This ratio is valuable because it gives you a healthy and achievable target for savings and housing. If you are saving 20% of your income, you're ahead of most people and are setting yourself up for financial success down the road. Average retirement savings is dangerously low. Thirty percent (30%) on housing creates a good anchor for how much you should pay; stick with it and you are able to spend more elsewhere. Can you spend 31% on housing? Sure, you can do whatever you want. But that 1% comes at a cost to something else, hopefully that 50% and not the 20%. If you need help creating a budget, we have a budget spreadsheet available here. If that doesn't work for you, here are ten free budgeting spreadsheets put together by my friend Bob.
2. Monthly expenses times six — emergency fund ratio  How much should you have in your emergency fund? Experts say at least six months of expenses. Some people believe you need 12 months, others say three; I say start with saving up $1,000. Get yourself to $1,000 in emergency fund savings as your interim goal, then follow the ratio through to the full six months. Figure out what you'll do once you hit six months. Maybe you ladder it in certificates of deposit to boost the earnings a meager amount. Maybe you just leave it be. Either way, you won't go wrong having six months. Six months is a good target and gets you on the path of saving. The biggest and likely emergency is job loss and six months will give you ample time to start cutting expenses back while you look for a new one. If you want to be more conservative, make it 12 months.
3. Limit mortgage to 2.5 times your income — mortgage ratio This is another ratio that's built off a basic premise — you should spend less than 30% of your take-home pay on housing. If you make $120,000 a year, this means your mortgage shouldn't be greater than $300,000. If you put a 20% down payment, that's a house worth $375,000. If you want more house, you need to come up with a bigger down payment. If you follow this ratio and assume an interest rate around 4%, your monthly mortgage payment works out to be about 28% of your take-home page. Assuming a $120,000 annual salary, your monthly take-home page is about $6,500. A 4% 30-year mortgage is around $1,800 assuming a 1.25% property tax.
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