How to Use Financial Rules of Thumb

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By Scott Snider, CPF®, CRPC®

Do you find it difficult to sort through all the "expert opinions" and confidently know how much to save for retirement, how much debt is appropriate or how much to set aside in savings for emergencies? You are not alone. To make life easier, I created a list of benchmarks that can be useful for anyone looking for general guidance on whether or not they are on track financially.

How to Use Rules As a Guide

Most of us need more specific direction than a set of arbitrary rules that say you have to save 10% in order to be successful in retirement. My experience with clients has shown that individuals and families often share a common thread when it comes to their types of goals, but the solution to their problems requires more customization. Why? The answer is simple. We are all human. Humans are very complicated creatures. And we frequently require specialized experts, like a doctor, to understand our problems, relate to our needs and translate complex issues in a way that allows us to make our lives better. (For more, see: 10 Bank-Breaking Money Myths.)

The reality is our emotions frequently drive the decisions we make and those decisions are sometimes not the most rational. That emotional complexity is further compounded by the fact we all have varying levels of access to financial resources, with differing ideas on how our resources should be used. Situations really begin to get overwhelming when our goals start competing for the same limited number of resources. The stress that follows is often what leads to irrational behavior.

Consequently, the further we drill down into our personal money issues, the problem solving required to meet our needs becomes a lot more complicated than any general guidelines can provide. The various financial trade offs that are at odds with each other might mean a person cannot afford to achieve every rule of thumb. Additionally, some of us may need more or less than what is generally prescribed. This is where an objective and competent financial expert will bring clarity. Such an expert, whether it be a friend or an advisor, increases your odds of successfully achieving financial independence.

Without further ado, scroll below to review the financial rules of thumb and use it as a way to benchmark your progress, but remember it's not the end 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 travel and hobbies.
  • Save 20% of your income for financial goals.

Save at least 10% of income for retirement:

  • 15% is ideal to ensure a secure retirement.
  • Whenever 10% is too much, start off small at 5% and increase incrementally by 1% every 6-12 months until 10%-15% is achieved.

Emergency fund = 3 months of living expenses at a minimum:


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

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

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

  • Applies to both owners and renters.
  • Owners - payment includes: mortgage, property taxes, homeowners insurance, association dues and private mortgage insurance.
  • $100,00 income example: maximum house payment = $2,333/month.

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

  • Includes car, credit cards, student debt and other.
  • $100,000 income example (Florida resident): net pay = $81,861 - maximum consumer debts payment = $1,364/month.

Total student debt :

  • Coming out of school, a graduate's student debt should be less than their annual salary.
  • Whenever the total student debt amount exceeds annual income, the borrower should strongly consider using an income-driven repayment plansuch asIBR, PAYE or REPAYE.


100 minus your age = percentage of investments to allocate to stock:

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

Contribute at least up to the company match in your 401(k) plan:

Limit concentrated stock ownership to 10% of investable assets, especially 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 more when they retire because they want to travel.
  • Others may spend less because the mortgage is usually paid off.

4% of investments is a safe withdrawal rate to avoid running out of money:

  • Highly dependent on retirement age, longevity expectations, risk exposure and investment performance.
  • Bad timing with investment returns relative to when you retire also has an impact.

It's always better to delay takingSocial Security:

  • True for retirees who have longevity in their family.
  • Not true for retirees with lower than average life expectancies.


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

A $150,000 income example:

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

Long-term care insurance is an appropriate asset protection strategy for those with a net worth between $200,000 and $2 million:

  • Anything below $200,000 and Medicaid planning is probably a better alternative.
  • Long-term care is best used for low to moderate incomes with a lot of assets to protect.
  • The average stay for a man is one year and the average for a woman is one and a half years.

Minimum auto policy coverage:

This article was originally published on Investopedia.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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