Put 20% down when buying a home. Don’t spend more than 30% of your income on housing costs. Keep child care expenses below 10% of your annual household income.
These money rules of thumb can be useful guardrails, helping you allocate spending and determine what’s affordable. They can also be incredibly defeating when they feel unattainable.
If money “rules” feel completely detached from your reality, know this: The average American doesn’t come close to hitting many of the popular money rules. And that’s OK.
“If you treat ‘rules of thumb’ as rigid rules, you’re setting yourself up for frustration,” says William O’Donnell, president of Heartland Financial Solutions in Bellevue, Nebraska. “The thing people tend to forget is that guidelines are flexible because everybody’s situation is different.”
What’s important is having a handle on your expenses and building a spending plan that works for you, not some ideal. Here’s how to view money rules of thumb in the context of your own personal financial reality.
THE RULE: Divide your budget into needs (50%), wants (30%) and savings (20%).
THE REALITY: Housing alone can easily eat up half of your take-home pay.
The 50/30/20 rule is a popular budgeting framework that divvies up after-tax income into three buckets: needs, wants and savings. But must-pay expenses can bust that budget before you even get started.
In 2020, for example, 23% of American renters spent half or more of their income on rent alone,…
