8 rules of thumb on saving and retirement

How much house can you afford?
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The rule: You shouldn't buy a house that costs more than 2½ years' worth of your income.

Why it works: During the wild years of the housing boom, consumers seemed to stop grounding their housing decisions in income. This rule can help remind consumers that income should be a primary criterion when deciding how much to pay for a house.

Grain of salt: One problem with this rule is it doesn't take into account how housing costs can fluctuate based on interest rates, says Pomeranz. For instance, a house that costs 2½ times your income may be unaffordable in a high-rate environment but easy to pull off in a low-rate environment, says Pomeranz.

A better guide to whether to buy a home is rental prices in your area, says Finke. If you could rent a home that meets your needs for less than it would cost to buy and maintain a home, then renting is a no-brainer, he says.




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