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Breaking the rules of personal finance
Even parents with financial savvy can make mistakes and not recognize the situation until it's too late. Here are a few errors to watch for:
Financial rules of thumb don't work for everyone, say the experts writing in Kiplinger's Personal Finance Magazine. Compare them to your own circumstances.
* Rule: Keep three to six months' after-tax income in a rainy-day fund.
First, consider your disposable income. If you could cover a large, unexpected expense you could get by on less. Remember that usually you won't have to use the entire fund right away. Put part of it in a one-year CD to get higher interest than you would in a savings account.
* Rule: Save 10 percent of your income. It's a good starting point if you are 25 years old. Beyond that, you'll have to save more. By age 45, you'll have to save much more.
* Rule: Monthly payments on installment debt (not mortgages) should not exceed 20 percent of your pay
No, it isn't just the debt, it's the amount of interest that matters. Debt with a greater interest rate than what you earn on investments should be eliminated.
* Rule: Drop collision coverage when your car is seven years old.
Consider the cost of coverage in relation to the car's value. Insurance won't pay more than the car's depreciated value.
* Rule: Life-insurance coverage should equal six times your annual income.
If you have a big family, you could need much more. If you have no dependents, you only need enough to cover final expenses.
* Rule: You'll need 70 percent of your present income in retirement.
Don't count on it, because expenses don't drop that much. You'll probably need closer to 100 percent.
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