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Personal Financial Planning — Part 2: Managing Basic Assets · 12 of 12
Personal Financial Planning — Part 2: Managing Basic Assets
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Rules of Thumb

Personal Financial Planning — Part 2: Managing Basic Assets Gitman, Joehnk, and Billingsley

Rules of Thumb

Cash & Savings Rules

  • Build 3-6 months of after-tax income in liquid reserves before pursuing any major purchase. (p. 130)
  • Compare effective (APY) rates, not nominal rates, when choosing savings vehicles. (p. 132)
  • Compounding frequency matters most when rates are high — at 12% nominal, daily-vs-annual spread is 0.74% vs. only 0.05% at 3%. (p. 133)
  • A checking account advertising 2% that charges $12/month loses money on any balance below ~$7,200. (p. 116)
  • Report a lost or stolen debit card within 2 business days to cap liability at $50; after 60 days, liability is unlimited. (p. 121)
  • All accounts held by one depositor at one institution aggregate against the $250,000 FDIC limit — multiple accounts do not mean multiple coverage. (p. 113)
  • A married couple can structure up to $1,500,000 in FDIC coverage at a single institution through distinct legal entities. (p. 113)
  • Securities purchased through a bank receive zero deposit insurance. (p. 113)
  • Treat savings as a priority bill — pay yourself first. (p. 130)
  • Reconcile your checking account monthly to catch hidden fees and prevent overdraft cascades. (p. 126)
  • A single bounced check triggers $50-$70+ in penalties from three separate parties: your bank, the depositor's bank, and the merchant. (p. 125)
  • Overdraft lines of credit charge interest on the full lending increment ($50 or $100), not the actual shortfall — effective rates can exceed 21%. (p. 125)
  • Stop-payment orders on lost or stolen checks are wasted money — you have no personal liability. (p. 125)
  • Series EE bonds defer federal tax until redemption; the investor controls the tax event. (p. 135)
  • I bond rates cannot go below zero and I bond values cannot drop below redemption value. (p. 135)
  • Early redemption of EE or I bonds under 5 years incurs a penalty of the last 3 months of interest. (p. 135)
  • CD early withdrawal penalties vary by institution — comparison-shop. (p. 134)

Auto Purchase Rules

  • Monthly auto payments must not exceed 20% of net monthly income. (p. 143)
  • Maximum purchase price = down payment + present value of affordable loan payments. (p. 144)
  • Never draw the down payment from your emergency fund. (p. 143)
  • New cars lose 20-25% of value in the first 18 months — buying a used car under 18 months old captures that depreciation savings. (p. 145)
  • Car loan interest rates can differ by up to 2% across lenders — shop for financing separately. (p. 144)
  • Negotiate in strict sequence: vehicle price first, then trade-in value, then financing last. (p. 148)
  • Use dealer invoice pricing as baseline and solicit competing quotes from multiple dealers. (p. 143)
  • Selling a trade-in privately generally yields more than the dealer's wholesale offer. (p. 146)
  • Skip extended warranties — most experts consider them unnecessary given manufacturer warranties of 3-7 years / 36,000-70,000 miles. (p. 146)
  • Flexibility on model and features improves negotiating leverage; fixation on a specific configuration weakens it. (p. 147)
  • Have any prospective used car inspected by an independent mechanic. (p. 145)

Housing & Mortgage Rules

  • PITI (principal + interest + taxes + insurance) must not exceed 25-30% of gross monthly income. (p. 164)
  • Total monthly installment payments (PITI + auto + other debt) must not exceed 33-38% of gross monthly income. (p. 164)
  • Non-mortgage debt directly reduces mortgage capacity — the lower of the two ratio limits binds. (p. 164)
  • Closing costs run 5-7% of home price — budget for them on top of the down payment. (p. 162)
  • PMI is required when the down payment is below 20%; it adds ~0.50% per year to loan cost. (p. 161)
  • Property taxes typically run 0.5-2% of market value annually; homeowner's insurance runs 0.25-0.5%. (p. 165)
  • Only two-thirds of savings function as down payment — assume one-third goes to closing costs. (p. 166)
  • The binding constraint on max home price is the lower of the income-based maximum and the down-payment-based maximum. (p. 166)
  • On a 30-year mortgage, total interest approaches the original principal; early payments are overwhelmingly interest. (p. 163)
  • An extra $25/month on a 30-year, 6%, $100,000 mortgage cuts the term to ~26 years and saves ~$18,500 in interest. (p. 181)
  • Consider refinancing when rates drop 1-2%+ below your current rate. (p. 180)
  • Refinancing break-even = total refinancing costs / after-tax monthly savings; refinance only when break-even is well below planned remaining months in the home. (p. 180)
  • Do not extend loan term when refinancing — match or shorten the original maturity date. (p. 181)
  • Check your existing lender first for refinancing — they often charge fewer points and lower closing costs. (p. 181)
  • Most lenders require at least 20% equity to refinance. (p. 181)
  • Fixed-rate mortgages suit buyers staying 5-7+ years who want payment certainty; ARMs avoid locking in during high-rate environments. (p. 178)
  • A standard fixed-rate mortgage with prepayment flexibility achieves the same result as biweekly or growing-equity products — without rigidity or extra fees. (p. 178)
  • Run the rent-or-buy worksheet before assuming ownership is cheaper — after-tax analysis often surprises. (p. 158)
  • If paying escrow, consider paying insurance and taxes yourself for greater cash flexibility if you have the discipline. (p. 165)

Cross-Cutting Rules

  • Cost is the single most important variable in every financial product comparison — not convenience, brand loyalty, or emotional appeal. (p. 123)
  • Information asymmetry is the consumer's primary disadvantage; research, regulation, and comparison shopping are the equalizers. (p. 114, p. 148, p. 171)
  • Every cash management product sits on the same liquidity-return tradeoff curve — more liquidity means less return. (p. 110)
  • The nominal rate is not the effective return once fees are included. (p. 116)
  • Tax treatment is a structural advantage — mortgage interest deductibility, bond tax deferral, and property tax deductions shape optimal behavior. (p. 135, p. 160, p. 165)

Key Quotes

"Smart consumers use cost as the single most important variable when choosing where to set up a checking account." (p. 123)

"Paying only an additional $25 per month on a 30-year, 6%, $100,000 mortgage reduces the term to about 26 years and saves about $18,500 in interest." (p. 181)

"Determining the largest mortgage for which you qualify is just the first step. You also need to consider your lifestyle needs." (p. 164)