3 Financial Rules of Thumb Worth Following

Personal finance is full of rules of thumb about saving, spending, paying off debt, and budgeting. These well-known financial guidelines help us apply proven methods for saving, investing, buying a home and even planning for retirement. They can be useful shortcuts for making quick calculations and decisions about finance. In this article, we’ll look at 3 financial rules of thumb that we believe are worth incorporating into personal finance decisions.

 

Rule 1: Budget using the 50/30/20 guideline

First introduced by US Senator and former Harvard professor, Elizabeth Warren, the 50/30/20 rule is a guideline that suggests breaking down income into three categories: 50% is for living expenses, 30% is spending money, and 20% is allocated to savings and paying debt.

This basic rule is a pretty simple one to follow – think of it as divvying up your paycheck into various “buckets”. The key to success is mixing and matching the proportions to find the right mix for you.

Access our budgeting template here to help you plan your budget.

Rule 2: Spend less than 30% of your income on housing

This long-standing rule originated as a universal measurement of housing affordability and can still be used today as a rough indicator of the limit to borrowing when it comes to applying for a home loan.

Of course this threshold is not fixed, and lenders will use a range of other factors to determine your borrowing capacity. Living expenses, level of debt and personal credit history are other factors that lenders will use to decide how much to lend to you.

In current times, with rampant house price inflation and rising rental costs, staying within the 30 per cent threshold could prove challenging. Which is why this guideline won’t work for everyone. But this rule is a good one to apply to ensure you’re not stretched to the point where any unexpected expenses could derail your finances.

Rule 3: Save 3 to 6 months of expenses for emergencies

This rule of thumb makes perfect financial sense with the theory behind it being, the less income sources you have, the more money you need to save for an emergency fund. Your emergency fund is the money you can access quickly, to pay for things like emergency medical treatment, unexpected repairs, or job loss.

It can take several years to save up enough funds to cover three to six months’ worth of expenses, but it’s worth it when things go wrong. Just knowing you have that financial safety net can be a real relief and may even stop you making bad financial decisions that could impact your long-term financial stability.

For more financial advice or assistance with refinancing or refixing your home loan, contact a Mortgage broker today.