5 Personal Finance Rules of Thumb

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When it comes to personal finance, there are some tried and tested principles, or rules of thumb, that are worth practicing. These well-known financial guidelines help us apply proven methods for saving, investing, buying a home and even planning for retirement. Here are five personal finance rules of thumb that could help you make quick calculations and decisions about your personal finance.

Rule 1: The 50/30/20 guideline for budgeting

The 50/30/20 rule is a simple guideline which 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. 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.

Rule 2: Less than 30% of your income should go on rent or mortgage

Once used as a universal measurement of housing affordability, this guideline can still be used today as a rough indicator of the limit to borrowing when it comes to applying for a home loan. While lenders use a range of factors to determine borrowing capacity, it’s a good idea to stay within the 30 per cent threshold 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 in an emergency fund

Saving an emergency fund is an excellent way to ensure you always have funds on hand to cover things like emergency medical treatment, unexpected repairs, or even job loss. Having at least three to six months’ worth of expenses saved up is a big ask, but it’s a significant financial safety net for when things go wrong.

Rule 4: Save 10 per cent of your income for retirement

This rule of thumb is more of a personal commitment than a rule as such, as it establishes good saving habits. By committing to set aside at least 10 per cent of your paycheck, you’re prioritizing saving, and the money could also be used for emergencies or as a deposit on your first home. 

Rule 5: Do an annual review of your finances

Conducting a thorough review of your personal finances each year helps you determine how much progress you’ve made towards reaching your financial goals. As you review, determine how much debt you’ve paid down, how much you have saved, and how much income you have earned. Then make any changes needed to your saving and spending, to start the next year afresh, one step closer to your financial goals.

For more financial advice or assistance with refinancing or refixing your home loan, or to book in a financial health check, contact a Mortgage Express branded mortgage adviser today