Rules of thumb are basically loose “rules” that apply broadly to many different situations. We talk about rules of thumb a lot here on Dough Roller.
When it comes to personal finance, the key word is "personal." There are no one-size-fits-all rules for running your budget, savings, retirement planning, or other aspects of your financial life.
With that said, some general, tried-and-tested rules can prove useful for planning your financial life. While you might decide to tweak these rules in application, they can be helpful for guiding your financial decision-making.
So without further ado, here are 31 financial rules of thumb that will help you rock your budget (and retirement savings, future financial planning, and more!).
1. Pay yourself first. This is an old rule of thumb that helps you save, rather than spending all your money. Even if your budget is tight, as soon as you get paid, put some money into savings. Saving first, rather than last, means you’re much more likely to save money instead of spending it.
2. Add your raise to your savings account. Once you’ve achieved a salary that funds a lifestyle you’re content with, don’t move significantly above that. When you get a raise, put it into savings rather than spending it. This can help avoid the problem of lifestyle inflation, while growing your savings significantly.
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3. When an appliance breaks, buy a new one if the appliance is 8+ years old or the repair would cost more than half the replacement cost. This goes for things like fridges, TVs, dishwashers, etc. Get an estimate on the repair cost. If that cost is 50% or more of the replacement cost, you’re usually wiser to just replace the broken appliance. And for older appliances, you might consider doing the same even if the repair costs are lower. Older appliances are more likely to have subsequent issues with other parts.
4. Use 12% of an unexpected windfall for a treat, but bank the rest. Whether it’s a gift, an inheritance, or an unexpected bonus, use just a small percentage to treat yourself right away. Put the rest in the bank, and give yourself a few months to think about the wisest way to spend that unexpected money.
5. Try the 50/30/20 rule for budgeting. If you’re new to budgeting, try allocating 50% of your take-home pay towards necessities (food, shelter, utilities, clothing, etc.), 30% towards lifestyle choices (vacations, gym fees, hobbies, cell-phone plans, etc.), and 20% towards financial goals and priorities (extra debt payments, savings, etc.). This isn’t a perfect budget, but it can be a good place to begin. Click here to learn more about this budgeting style.
6. Track at least your problem spending areas. Some people like a very detailed budget. Others, not so much. If you don’t want to track every line item, track at least those areas where you tend to over-spend, whether that’s dining out, buying new clothes, or spending on kids’ items. This can help you control your spending without being bogged down by an over-detailed budget.
7. Spend about 1015% of your budget on food. This includes groceries as well as dining out. If you struggle to keep your budget within this range, find places to cut back.
8. Allot 210% of your budget for personal items. This includes items like entertainment, getting your hair cut, and buying clothing, which would take up no more than about 8% of your monthly budget. This is a flexible area, though, and you can always cut back if you need to save more money.
Savings and Investing
9. Save three to six months’ expenses in an emergency fund. There are lots of different rules of thumb for this one, but this one makes the most sense for the most people. Remember, this is expenses not income. And if you’re in a volatile field of work or the economy is in a downturn, consider saving eight or even 12 months’ worth of expenses.
10. Use the rule of 72 to determine how long it will take your investment to double. To use this rule, divide 72 by the expected growth rate of your investments, expressed as a percentage. If you expect to earn 10% per year, for instance, it'll take you about 7.2 years to double your money. Learn more about this rule and how to use it here.
11. Aim to have your portfolio double about every ten years. How do you know if your investments are on track and growing well? One rule of thumb is that your portfolio, if well-managed, should double about every ten years. Your mileage may vary, of course, but if you’re not even close to doubling after a decade, consider rebalancing your investments.
Related: Time-Based vs Opportunistic Rebalancing
12. Put no more than 3035% of your net income towards minimum debt payments. This is the rule if you have a mortgage. If you don’t have a mortgage, then you should put no more than 3035% of your net income towards both minimum debt payments and your monthly rent. This is a somewhat high figure, and it’s always better to have even less of your income devoted to debt. But the 3035% range is what mortgage lenders, in particular, will look at when considering the debt-to-income ratio.
13. Pay off your highest-interest debt first. You’ll find lots of disagreement about debt repayment methods, but this is the one that will save you the most and get your debt paid off most quickly. One time you might want to deviate: is if you’re trying to boost your credit score quickly. In this case, first pay off any credit cards that are currently maxed out. Then, pay off debt from the highest to the lowest interest rate.
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14. Save 1020% of your income for retirement. The old rule of thumb was to save 10% of your gross income for retirement. That seems to be a little low these days, especially for younger workers who may not have a pension to fill in the gaps. Aim a little higher than that, especially later in your career, if you really want to be ready for retirement.
15. Subtract your age from 100; the resulting number is the percentage of your portfolio you should invest in stocks. If you’re 50, for instance, you should invest about 50% of your overall portfolio in stocks. This is another rule of thumb that can vary greatly. If you’re more risk-tolerant or planning to work and invest longer, you could bump this rate up. If you’re less risk-tolerant or want to retire early, you might consider a more conservative style.
16. Always take the employer match on your retirement account. If your employer offers any match at all for retirement investments, save at least enough to get that match.
17. Plan for your annual retirement needs by calculating your current pre-retirement expenses, plus 10%. Many rules of thumb say to aim to live on a certain percentage of your current income in retirement. But if you’re saving a significant portion of your income and still living well, this may not make sense for you. Instead, use your expenses to calculate your annual retirement needs.
18. Aim to save 1X your annual salary by 35, 2X by 40, 3X by 45, and so on. This is a rule to help you see if you’re saving enough for retirement. If you’re far off of these numbers at the various ages, consider cutting your spending to boost savings.
Related: The book Money Ratios offers more details on where you should financially be at a given age.
19. Save for retirement first, and your kids’ college expenses second. This is counterintuitive for parents who spend their lives putting their kids first. But remember: your child can borrow, if need be, for college. You cannot do the same for retirement.
20. Limit your student loan borrowing to your first year’s expected annual salary. To keep your student loan borrowing in check, do some research on typical first-year salaries in your field. Keep your student loans’ total balance to this amount or, preferably, much less.
21. Put at least 20% down when you buy a home. This is a good idea for two reasons. For one, it limits the total amount your borrow on your home, leading to significant savings over time. For another, it means you don’t have the added expense of private mortgage insurance (PMI). Also, it makes you much less likely to go underwater on your home if the market has another major downturn.
22. Buy a home that costs no more than 2.5 to 3 times your gross annual income. Again, this is a good way to limit your spending on your home, keeping things within an affordable range for you. However, it doesn’t take interest rates, taxes, and insurance into account. If interest rates are high or your property taxes will be enormous, consider limiting yourself to just 2X your annual income.
23. Consider refinancing your home if interest rates drop by 1% or more. The important piece of this rule of thumb is “consider.” Refinancing is always a case-by-case issue, depending on how long you plan to own the home, your current rate, and how much the refinance will cost. But if rates drop by 1% or more, you should at least take time to do the math on a refinance.
24. Fix your mortgage rate for at least as long as you plan to be in your home. Fixed-rate mortgages are the norm, for many reasons. But if you’re considering a variable-rate mortgage, make sure that the rate will be fixed for at least as long as you plan to be in the home. Variable rates can make sense if you’re planning to move on in a couple of years. But even then, they can be dangerous, so just be careful.
25. Don’t prepay a low-rate, deductible mortgage. Deciding whether or not to prepay on your mortgage can be tough. But, generally, if you’re already getting a good rate, you should use that money for other important financial goals. This is especially true if you’re talking about your primary residence, where the mortgage interest will be deductible on your federal income taxes.
26. Plan to buy used, or buy new and drive the car for at least 10 years. Generally, buying new isn’t the better financial option. But if you can definitely drive the car for 10 years or more, buying new can sometimes be a decent financial investment.
27. Use the 20/4/10 rule if you must finance a vehicle. Your best bet is to pay cash for any vehicle. But if you must borrow, put at least 20% down. Don’t finance the car for more than four years, and don’t put more than 10% of your income towards payments. This may limit your means to buy a nice vehicle, but it’ll keep you from making stupid decisions at the car lot.
28. To estimate the actual cost of owning a car over five years, double the price tag and divide that by 60. So if you’re buying a $10,000 car, it’ll cost about $333 per month for all its expenses, including plating and insurance.
29. Don’t spend more than 20% of your take-home pay on all costs for all the vehicles you own. This includes costs like insurance, plates, and maintenance, too. Again, this can seem limiting if you’re setting your sights on an expensive vehicle. But limiting your total vehicle costs to 20% or less of your take-home pay will keep you from spending way too much on a depreciating asset.
30. Have 56 times your gross annual salary in life insurance coverage. If you need life insurance, term is usually (though not always) the best bet. When deciding how much term coverage to get, multiply your annual salary by five or six, and opt for at least that much total coverage. If you have special life insurance needs, like multiple children or high amounts of debt, consider getting even more. If you don’t bring in an income but provide essential services to your family
31. Use insurance for catastrophic expenses, not basic ones. As with high-deductible healthcare plans, this is the way the insurance world in general is going. Whether it’s car insurance or homeowners, you shouldn’t rely on your insurance to pay for expenses you can handle out of pocket. This will only increase your deductible and your overall costs over time. Instead, look at insurance as a last-ditch backup, rather than a financing plan for general life costs.