Money Monday: 10 Great Financial Rules of Thumb

Money Monday tries to give you the latest and greatest personal finance advice because we like you, we really like you. (See one happy Tandem resident to the right.) Now over at Two Cents, they have 10 Good Financial Rules of Thumb. Here are a few of our favorites:

10 Good Financial Rules of Thumb


The 50/30/20 Rule

This is a popular rule for breaking down your budget. The 50-30-20 rule puts 50 percent of your income toward necessities, like housing and bills. Twenty percent should then go toward financial goals, like paying off debt or saving for retirement. Finally, thirty percent of your income can be allocated to wants, like dining or entertainment.

There are also variations to this rule, like the 80-20 rule, in which you use 20 percent of your income for financial goals, then spend 80 percent on everything else.

Why It Works: If you’re not sure where to start with a budget, breaking it up into these basic categories can be really helpful. Those percentages help create a balance between obligations, goals and splurges.

When It Doesn’t: You might have trouble with this if you have a hard time separating needs from wants, even with something like housing. If you live in a low-cost area, 50 percent toward housing and bills might be a lot. On the other hand, if you’re not earning much, you might not have the luxury of only spending half your income on necessities.

These rules of thumb are good starting points for your spending. But maybe you want to adjust them, or make a budget that’s more tailored to your situation. In that case, start from scratch,follow a few budgeting steps and design something that works best for you.

Student Loans

The First-Year Salary Rule

You shouldn’t take out more in student loans than you expect to make your first year on the job.

Why It Works: It ensures you’re taking out an affordable amount that you’ll be able to repay.

When It Doesn’t: Rising tuition rates have made following this rule a challenge, as have unemployment rates.

This is a sticky and complicated topic. Precisely because we are in the middle of a student debt crisis, it’s easy to knock this rule. To get a realistic idea of what your income and repayment are going to look like after college, find out how hard it will be to pay off your loan, based on your major. You can also compare the cost of an education at different universities to get a better idea of what you can afford.

Saving and Investing

The 6-Month Emergency Fund Rule

You should have six months’ worth of savings on hand in case of an emergency.

Why It Works: Obviously, this is a big help in case an emergency arises in your life. It keeps you from having to make desperate decisions that can set you back.

Why It Doesn’t: There are so many different opinions on how much you should have saved. Some say between 3-6 months; others say there are times when an emergency fund is unnecessary altogether. There’s also the argument that, by keeping so much money in a low-to-no interest savings account, you’re missing out on a potential return.

  • Income
  • Different types of emergencies that may arise for you
  • Net worth
  • Your monthly expenses

If you’re in emergency mode, you’ll probably also pare down your monthly expenses, so consider that in your decision too.

The Age Rule for Stocks

Generally, bonds are considered a conservative investment, and stocks a riskier asset. So experts say, the older you get, the less you should invest in stocks. To put a number on it, subtract your age from 120 (the old rule was 100, but many experts now say 120 makes more sense). That’s the percentage of your portfolio that should be invested in stocks.

Why It Works: It gives you a general idea of what your asset allocation should look like, based on your age.

Why It Doesn’t: This rule doesn’t consider the incredibly low interest rates we now have to contend with. It also assumes your retirement based on your age. If you’re planning to retire sooner, you’ll need to adjust.

If you want to get a better idea of how much you should have saved in stocks and bonds, consider using an online tool. I use Personal Capital‘s asset allocation tool. It analyzes your portfolio and tells you what exactly you should invest in to keep things balanced. But there are quite a few of them out there.

Most of these rules are pretty solid, tried-and-true methods for planning your finances. But again, personal finance is, well, personal. These rules are a good starting point, but to really stay on top of your finances, research and personalized planning is a necessity.

For the rest of the article, including tips on buying cars, check out 10 Good Financial Rules of Thumb.