Money Magazine came up with 25 “rules of thumb” that will help your grow rich, albeit very slowly. Rules of thumb are often appropriate only for a fictional “average person,” but they can be good starting points for determining what is the right choice for any individual. I’ve looked at the first fifteen so far, and here are the next five:
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.
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. This depends on your driving needs. If you have a long commute, and your job performance depends on your timeliness, you don’t want to continue to driving a car that is getting closer to “junk” status. Buying a car that is just a few years used is a good option for most, but driving until it breaks down is not safe.
Only five more “rules,” so stay tuned if you’re interested in my thoughts. So far, these are decent rules of thumb, but the headline claiming that they’ll make someone rich is pretty misleading. You’ll save some money, but it’s not going to be significant over a lifetime. The money you save can be put to better use, however.
Updated January 2, 2018 and originally published October 25, 2006.
{ 4 comments… read them below or add one }
Okay, now that this series has been posted, I want to comment on item 16.
While it is generally good to go with a higher deductible to reap a nice monthly savings, it is not always worthwhile. There certainly is the higher deductible that you need to be aware of (and hopefully saving for), but sometimes the savings is all that significant.
For my auto insurance there are three levels of deductibles: $250, $500, and $1000; I chose the $500 deductible. I saved $45 a month by choosing the $500 deductible over the $250 deductible; this was definitely worth it to me. I called to see how much I would save by switching to the $1000 deductible, and it was a mere $8 per month; that is definitely not worth it to me. So, to save $8 a month, I am in jeopardy of losing an addition $500 until I have done saved the $8 for 62.5 months… no thanks. If I need to save an additional $8 a month that bad, there are plenty of other things I could do, like drop my Internet service to the next slowest speed, pass up two pay-per-view movies, clip more coupons, or do one more mystery shop.
Dus10: You just described my car insurance situation perfectly. The $500 deductible was a significant savings over $250, but the savings of a $1,000 deductible was only a few dollars a year. It didn’t make financial sense to save less than $20 a year and take the risk of paying another $500, which, considering the amount of driving I do, would be necessary sooner or later.
As it happened, it’s “sooner.”
Other people’s prices for different deductibles may work out differently… so you have to look at your own situation and shop around, etc.
I agree the highest deductible may not always be the best choice. You have to do a cost risk analysis for your situation. For my calculation, I use a 7 year period. If I need to use the insurance within 7 years, do I come out ahead by getting the higher coverage? Remember when you buy full coverage insurance, you are also getting the best lawyers (your insurance company) to represent you. If you do not have full coverage and the other driver does, you will be fighting the best lawyers (their insurance company) in court.
I disagree with the car assumption. Try to find a used car with less than 12,000 miles on it, great condition, and is 30% less than the new car price. Also, include the time-cost of trying to find that car. For example a 2009 Toyota Corolla can be bought within four hours for $15,350. Using your 30% rule and within 4 hours, I can be pulling up in my drive way with a 2008 Toyota Corolla with less than 12K miles on it, without any mechanical problems, with only very minor cosmetics issues, and it will only cost $9,180.