Just because something is common knowledge doesn’t mean it’s actually fact.
Many people turn to well-known financial rules of thumb to help guide their financial strategies. But how practical are these rules? Here’s a closer look at five commonly accepted rules of thumb regarding money, and how well they hold up in real life.
1. The 50/30/20 Rule
The classic 50/30/20 rule for budgeting suggests allocating 50% of your income for needs like rent or fuel, 30% for wants like new clothes or entertainment, and 20% for savings. This model allows for easy scalability and customization, so if your utilities increase one month, you can adjust as needed.
Though this can be a helpful starting point and can simplify budget adjustments, the rule often doesn’t match the reality of increased living costs and fluctuating economic conditions. Enter the 60/20/20 rule – a more practical approach for many. With the 60/20/20 rule, you allocate 60% of your income to living expenses and necessities. The remaining 40% of your income is divided equally between wants and savings.
2. The 20% Down Payment
Saving 20% for a down payment on a home is a common starting point. It’s an amount generally needed to avoid additional costs like private mortgage insurance. It can also reduce the total amount you need to borrow and help you secure lower monthly payments. But with housing costs on the rise, saving that much can feel impossible – and that money might be better spent on other needs.
The truth is that while a 20% down payment is ideal, it’s not the only path to homeownership. Many affordable mortgage options exist with much lower down payment requirements, particularly for first-time or low-income homebuyers, offering a bridge for those who might otherwise be priced out of the housing market. Many cities and counties also offer down payment and closing cost assistance for qualified buyers or properties. If you can’t save 20% for a down payment, don’t let it deter your plans. Homeownership may still be within your reach.
3. The 6-Month Emergency Fund
We’ve all heard the recommendation to save six months’ worth of expenses to cover emergencies and surprise costs –and this rule of thumb is largely correct. Your emergency fund is your financial backup for the unexpected, from job loss to medical bills. Without adequate savings, events like these could quickly become financial crises.
As retirement approaches, though, you may want to expand your emergency fund to cover a year or more of expenses. This adjustment accounts for the potential decrease in income and rising expenses in retirement, such as healthcare. Beefing up your emergency fund can help you smoothly transition into retirement. While the exact amount you should save will vary by your circ*mstances and stage in life, the goal is ultimately to create a financial buffer that adapts to your changing needs.
4. The Million-Dollar Retirement
It’s widely considered sound financial advice to have at least $1 million saved before you retire – but do you really need that much? The answer depends on how you envision spending your retirement.
Do your retirement plans include travel abroad and frequent dining out, or would you prefer to stay close to home? The first option would likely require much larger retirement savings. Factors like anticipated healthcare needs and housing plans will also influence how much you should save. Calculate your expenses accordingly to ensure your savings can support a fulfilling and financially feasible retirement.
5. The “Age in Bonds” Rule
The “age in bonds” investment rule suggests matching the percentage of bonds in your investment portfolio to your age. For instance, if you’re 35 years old, you would aim to have at least 35% of your investments in bonds. The goal of this rule is to decrease your portfolio’s risk level as you near retirement, accounting for the decreased time before you’ll need your funds. However, this oversimplified approach doesn’t fit everyone’s risk tolerance or financial goals.
With people living longer and needing their savings to stretch further, you might benefit more from a nuanced mix of investments that promotes growth and security. Speak with a wealth management professional to find an investment strategy and portfolio balance that suits your individual needs.
Your Financial Rules
While financial rules of thumb can be helpful guidelines for your money moves, they’re not one-size-fits-all. By adapting these rules, you can create a strategy that reflects your personal goals, challenges and opportunities. The essence of personal finance is in its name: personal. It’s about making informed decisions that pave the way to financial stability and success on your terms.
Whether you’re fine-tuning your budget, planning for retirement, or somewhere in between, Amegy Bank is here to help you make sense of it all. Reach out today, and let us help make your financial goals a reality.
The information provided is presented for general informational purposes only and does not constitute tax, legal or business advice. Any views expressed in this article may not necessarily be those of Amegy Bank.
