How to Use Financial Rules of Thumb

By Scott Snider, CPF®, CRPC®

Do we find it formidable to arrange by all a “expert opinions” and quietly know how many to save for retirement, how many debt is suitable or how many to set aside in resources for emergencies? You are not alone. To make life easier, I combined a list of benchmarks that can be useful for anyone looking for ubiquitous superintendence on either or not they are on lane financially.

How to Use Rules As a Guide

Most of us need some-more specific instruction than a set of capricious manners that contend we have to save 10% in sequence to be successful in retirement. My knowledge with clients has shown that people and families mostly share a common thread when it comes to their forms of goals, though a resolution to their problems requires some-more customization. Why? The answer is simple. We are all human. Humans are unequivocally difficult creatures. And we frequently need specialized experts, like a doctor, to know a problems, describe to a needs and interpret formidable issues in a approach that allows us to make a lives better. (For more, see: 10 Bank-Breaking Money Myths.)

The existence is a emotions frequently expostulate a decisions we make and those decisions are infrequently not a many rational. That romantic complexity is serve compounded by a fact we all have varying levels of entrance to financial resources, with incompatible ideas on how a resources should be used. Situations unequivocally start to get strenuous when a goals start competing for a same singular series of resources. The highlight that follows is mostly what leads to undiscerning behavior.

Consequently, a serve we cavalcade down into a personal income issues, a problem elucidate compulsory to accommodate a needs becomes a lot some-more difficult than any ubiquitous discipline can provide. The several financial trade offs that are during contingency with any other competence meant a chairman can't means to grasp each order of thumb. Additionally, some of us might need some-more or reduction than what is generally prescribed. This is where an design and efficient financial consultant will move clarity. Such an expert, either it be a crony or an advisor, increases your contingency of successfully achieving financial independence.

Without serve ado, corkscrew next to examination a financial manners of ride and use it as a approach to benchmark your progress, though remember it’s not a finish all be all.


The50/30/20 rule:

  • Spend 50% of your income on needs, like housing and bills.
  • Spend 30% of your income on discretionary wants, like transport and hobbies.
  • Save 20% of your income for financial goals.

Save during least 10% of income for retirement:

  • 15% is ideal to safeguard a secure retirement.
  • Whenever 10% is too much, start off tiny during 5% and boost incrementally by 1% each 6-12 months until 10%-15% is achieved.

Emergency account = 3 months of vital losses during a minimum:


Total of all debt payments = 36% or less of monthly sum income:

  • Mortgage, car, credit cards, and tyro loans.
  • $100,000 income example: limit debt payments = $3,000/month.

Housing payments = 28% or less of monthly sum income:

  • Applies to both owners and renters.
  • Owners – remuneration includes: mortgage, skill taxes, homeowners insurance, organisation impost and private debt insurance.
  • $100,00 income example: limit residence remuneration = $2,333/month.

Consumer debt payments = 20% or less of monthly take-home income:

  • Includes car, credit cards, tyro debt and other.
  • $100,000 income instance (Florida resident): net compensate = $81,861 – limit consumer debts remuneration = $1,364/month.

Total tyro debt :

  • Coming out of school, a graduate’s tyro debt should be reduction than their annual salary.
  • Whenever a sum tyro debt volume exceeds annual income, a borrower should strongly cruise regulating an income-driven amends plansuch asIBR, PAYE or REPAYE.


100 reduction your age = commission of investments to allot to stock:

  • Example: a 40-year-old should have 60% in holds and 40% in holds and cash.

Contribute during slightest adult to the company match in your 401(k) plan:

Limit concentrated stock tenure to 10% of investable assets, generally in retirement:

Example of $500,000 invested in CSX Corporation (CSX):

  • A 35% decline similar to what happened in 2016 is a loss of $175,000.
  • A 63% decline like what happened in 2008 is a loss of $315,000.


Retirement income should be 80% of your pre-retirement income:

  • Lifestyle dependent.
  • Some people spend some-more when they retire since they wish to travel.
  • Others might spend reduction since a debt is customarily paid off.

4% of investments is a protected withdrawal rate to equivocate using out of money:

  • Highly contingent on retirement age, longevity expectations, risk bearing and investment performance.
  • Bad timing with investment earnings relations to when we retire also has an impact.

It’s always improved to delay takingSocial Security:

  • True for retirees who have longevity in their family.
  • Not loyal for retirees with reduce than normal life expectancies.


Life word coverage = 6 to 8 times your annual income:

A $150,000 income example:

  • 6x income = $900,000.
  • 8x income = $1.2 million.

Long-term caring word is an suitable item insurance plan for those with a net value between $200,000 and $2 million:

  • Anything next $200,000 and Medicaid planning is substantially a improved alternative.
  • Long-term caring is best used for low to assuage incomes with a lot of resources to protect.
  • The normal stay for a male is one year and a normal for a lady is one and a half years.

Minimum automobile process coverage:

This essay was creatively published on Investopedia.

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