Discover the Essential financial rules of thumb that can help you make wise money decisions and achieve your financial goals. Managing your finances can be a daunting task, especially if you’re not a financial expert. However, there are some financial rules of thumb that can help you make smart money decisions and stay on track towards your financial goals. In this article, we’ll go over some of the most important Essential financial rules of thumb that everyone should know.
Rule 1 of thumb financial : The 50/30/20 Rule
One of the most popular financial rules of thumb is the 50/30/20 rule. This rule suggests dividing your income into three categories:
- 50% for essential expenses (such as rent, utilities, and groceries)
- 30% for discretionary expenses (such as dining out, entertainment, and hobbies)
- 20% for savings and debt repayment
This rule is a great way to balance your spending and savings goals while ensuring you’re not overspending in any particular area. In addition, it’s important to note that the percentages can be adjusted based on your individual circumstances. For example, if you have high student loan debt, you may need to allocate more than 20% towards debt repayment.
Rule 2 of thumb financial: The 3-6 Month Emergency Fund
Life is unpredictable, and unexpected expenses can arise at any time. Therefore, there is an emergency fund is crucial for financial stability. The general rule of thumb is to save enough money to cover 3-6 months of essential expenses. This includes things like rent, utilities, food, and transportation.
Having an emergency fund can help you avoid going into debt or relying on credit cards in case of a job loss, medical emergency, or other unexpected event. So, we should set aside a small amount each month until you reach your goal.
Rule 3 of Financial Rules of Thumb: The 28/36 Rule
When it comes to buying a house, the 28/36 rule is a good guideline to follow. This rule suggests that your housing expenses (including mortgage, property taxes, and insurance) should not exceed 28% of your gross monthly income. Additionally, your total debt payments (including housing, credit card debt, car loans, and other loans) should not exceed 36% of your gross monthly income.
This rule can help you determine how much house you can afford and avoid taking on too much debt. On the other hand, keep in mind that this is just a guideline, and your individual circumstances may require a different approach.
Rule 4 of financials: The Rule of 72
If you’re interested in investing, you should use the Rule of 72 as a tool for estimating how long it will take for your money to double. Simply divide 72 by the annual rate of return to get the number of years it will take for your investment to double in value.
For example, if you have an investment that earns 8% per year, it will take approximately 9 years for your money to double (72 divided by 8 equals 9). So, this rule can help you compare different investment options and make informed decisions about where to put your money.
Rule 5: The 10% Rule
Saving for retirement is a long-term goal that requires consistent effort. The 10% rule suggests that you should aim to save at least 10% of your gross income for retirement. This can include contributions to a 401(k), IRA, or other retirement accounts.
Therefore, starting early and consistently contributing to your retirement savings can help you reach your retirement goals and enjoy financial security in your golden years. If 10% seems unattainable, start with a smaller percentage and gradually increase it over time.
Rule 6 of Rules of Thumb: The Debt-to-Income Ratio
As you get closer to retirement, you may want to adjust your allocation to be more conservative. Although, this rule is not a one-size-fits-all solution. But it can be a helpful starting point for determining your investment strategy.
Rule 7 of thumb financial: The Rule of 20
Investing can be a complex and intimidating process. But the Rule of 20 can help simplify things. This rule suggests subtracting your age from 100 to determine the percentage of your portfolio. It should be invested in stocks. For example, if you’re 30 years old, you should aim to have 70% of your portfolio in stocks (100 minus 30 equals 70).
On the other hand, If you get closer to retirement, you may want to adjust your allocation to be more conservative. Although, this rule is not a one-size-fits-all solution. But it can be a helpful starting point for determining your investment strategy.
Conclusion: Understanding Essential Financial Rules of Thumb
Managing your finances can be challenging. However, these financial rules of thumb can help simplify the process and guide you towards smart money decisions. Moreover, these rules can be applied to different areas of your financial life. You can achieve your goals and improve your financial stability from budgeting and saving to investing and debt management. Beside, remember, these rules are just guidelines, and your individual circumstances may require a different approach. However, by following these rules, you’ll be on your way to a healthier financial future.