3 Financial Rules That Help You Borrow Better
Be honest — when you’re making decisions about your finances, you’re winging it half the time.
After all, it’s not like your budget comes with an instruction manual that tells you how to manage or borrow money. You’re picking things up as you go, learning to shop for cash advances and pay them off through trial and error.
Wouldn’t it be easier if you had a set of rules to refer to for guidance? While step-by-step instructions on how to run your financial household don’t exist, here’s the next best thing. Check out these financial rules of thumb to help you handle cash advance loans online like a pro.
1. The 20/10 Rule
If you rely on cash advances like installment loans and lines of credit often, this rule can help you gain some perspective on your borrowing habits.
The 20/10 Rule sets sharp spending caps on debt payments according to your yearly and monthly net income (that’s your take-home pay after taxes).
Your debt payments should take up no more than 20% of your annual net income and 10% of your monthly net income.
These numbers represent the maximum amount you should be spending, so aim to go under. If you’re over, look to your budget to see how you can pay off debt and build an emergency fund to offset your reliance on cash advances.
2. The 20/4/10 Rule
For those looking to finance their car with auto loans, this rule sets out some boundaries about your financing:
- Put down a down payment of 20% or more of the car’s purchase price
- Your loan term shouldn’t exceed four years
- You shouldn’t spend more than 10% of your monthly income on all vehicle expenses, including maintenance, gas, insurance, and loan payments
Don’t worry if you can’t hit all of these guidelines perfectly. A lot has changed since this rule was established. Gas prices are at an all-time high, and it’s not a great time to buy used or new cars. This rule is here to help prevent you from overborrowing on a car, so try to stick to these numbers as close as you can.
3. The 28/36 Rule
Next on the list is a rule governing your debt-to-income ratio (DTI), a number that lets you know how much of your income goes towards debt payments. Your DTI includes any debt you pay, from cash advances, lines of credit, credit cards, mortgages, student loans, installment loans, auto loans, and more.
The 28/36 Rule says you should spend:
- No more than 28% of your income on household costs
- No more than 36% of your income on debt payments
Going over these limits puts pressure on your budget, as most of your cash will go towards the roof over your head and debt, leaving very little for other essentials and savings.
If you struggle with the 28/36 Rule, talk to a free credit counseling organization about your options. A reputable organization can give you actionable advice on budgeting and paying off debt.
Some people perform better when they have rules. If you appreciate setting financial boundaries, lean into these guidelines. They’ll help you take stock of your finances — whether you’re in the process of looking for an advance or paying one back.
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