When it comes to your money, rules of thumb are good when it comes to the approximate guideline for any decision you will need to make. There are so many thumb rules that you can be able to follow and keep track of.
Everyone is in a different situation but there are some things you can be able to consider. With your situation, you will need to evaluate each thumb of a rule before you can be able to apply to your scenario.
Budgeting:
The 50/30/20 Rule
I discussed in detail in this rule on budgeting in one of my previous articles.
This rule requires that you spend up to 50% of your income towards your needs such as housing and bills, 30% towards wants like fine dining, entertainment, fancy clothing and 20% towards your financial goals such as retirements, paying off debt.
The variant of this rule is the 80/20 rule which means you spend 80%on everything else and put away 20% for your financial goals
.
The Upside: Not sure where to start with your budget? This will be an excellent place to start. It will help you break down your expenses into the most basic categories and the percentages will help you balance between your obligations, goals, and splurges.
The Downside: It might be a little bit difficult to separate your needs and wants and even with something like housing. You might find that if you living in a low-cost housing area, the 50% for the needs might be a little bit too much. Sometimes, if you are not making so much money, you might not need to spend 30% on luxuries.
This rule of thumb is a good starting point for the spending but you might need to adjust the budget to meet your situation.
Buying a vehicle
The 20/4/10 rule
When it comes to purchasing a car, you need to have a down payment of at least 20% value of the car you intend to purchase. You should also not spend more than 4 years financing the vehicle and not spend more than 10% of your gross income on transport costs.
The Upside: This will prevent you from getting a vehicle(s) that you cannot afford and it also means that it considers your budget as an ongoing concern by taking into consideration the cost of transport.
The cost will need to include fuel and also insurance which will vary based on the type of vehicle you have. These costs, however, do not include your car repayment amount.
The Downside: Taking into consideration your current situation, the number might not be realistic in the following ways. You might have a fuel guzzler of a vehicle or a very long commute to work that does not pay you so well hence your transport cost might be more than 10%. On the other side, you might actually have enough money to get your car in cash hence there no need for you to take a loan on interest hence in this case the rule will not apply to you.
Retirement
The 10% Rule
This is the most traditional aspect of saving up for your retirement. It basically means to save 10% of your income towards retirement.
The Upside: It is simple becomes it gives you are the number that you can work with. You are still young and you have started working and have just opened your first retirement account, and you are not so sure what amount of money to start saving up towards your retirement? 10% would really be a good start.
The Downside: though very simple to apply, this percentage does not take into consideration how much you will actually need for retirement. It also does not take into mind what you currently have saved up and if you are playing catch-up you will need to save up more than the 10% of your income. Other factors are if you would like to retire early or be more lavish in retirement, then 10% is not enough.
The Income Rule
When it comes to deciding how much money you will need for your retirement, there is the 20 times your annual gross income thumb rule.
The Upside: This actually gives you a good focus on what you will need for the future.
The Downside: when it comes to retirement, your envisioned expenses then will definitely be different based on how much you currently are earning. This will also be determined by the kind of a lifestyle you would like to have, you might require less or more than your current income.
The 6-month emergency Rule
In my last article, I discussed at great length on how to set up your emergency fund. The financial thumb rule of this is that you will need to have at least 6 months’ worth of savings in case of an emergency.
The Upside: For the most basic reason, in case of an emergency that might crop into your life, this will keep you sane and help prevent you from making some very desperate decisions that can really set you back big time.
The Downside: There are very many reasons as to how much you should have saved up in the case of an emergency. Some will say, three to six months is good, others will not see the need for it all together. Then there is one who will see it as loss of income or returns because such kind of funds is put in low to no interest savings accounts altogether.
Any experience you have with these rule of thumb? Kindly do share
Find out what other personal finance thumb rules you can use when it comes to buying stocks, student loans, home ownership just to mention a few.
Any experience you have with these rule of thumb? Kindly do share
Find out what other personal finance thumb rules you can use when it comes to buying stocks, student loans, home ownership just to mention a few.
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