Interesting Financial Rules to Follow (?)

Came across this article from Kiplinger this morning, and can’t say I’ve heard of half these rules of thumb before, haha… Maybe that’s why they’re so breakable?! :)

Financial Rules of Thumb to Consider Breaking

They’re bolded below, along with my own two (free) cents, and an attempt at comparing them to our own finances to see if we’re on track or not :)

Anyone following any of these?!

“Spend no more than half of your income on living expenses, keep discretionary items to 30%, and save the rest.”

People sure would be better off if they followed this, but I have yet to run into anyone who actually budgets off percentages, do you? In theory I think it all makes sense, but I tend to just cut back in all the areas I’m able to cut back in (some months it’s good, and others not!), and then at the same time stash as much savings as I can each month as well.

Maybe it breaks down into similar %’s over time, I’ve never really run the numbers, but so far it’s been working out well, at least since I’ve wrapped my head around all this stuff a decade ago :) Ask the old me though and I couldn’t tell you *what* I was spending on, no less the pie percentage!

At any rate, here’s where our current finances would break down if it was pie’d up like that:

  • Living expenses: 60%
  • Discretionary: 20%
  • Savings/Investments: 20%

So not too far off, actually! Although there’s a number of items in there I had to guess on as wasn’t sure what category they’d fall into… (says the guy who blogs about finance for a living!!)

“You can afford a home that’s two to four times your annual gross income.”

Well this one should be an easy one to compare to since we literally just bought a house!! :) Doing the math on this bad boy pushes us out into the $320,000 – $640,000 range, where I’m glad to see we’ve landed wayyy on the lower end of the scale here – woo!!

Although if you recall, we did get approved all the way up to $800,000 from one source, so it seems pretty accurate at least on the lender’s side. And not to be confused with what you can *actually afford* btw, since the banks are happy to loan out as much as they can get away with because it means more $$$ for them!! So don’t fall for that trick like many of us have over the years!

“You need life insurance equal to eight to 10 times your annual pretax income.”

No idea where this figure comes from, but if we stayed in line with it we’d need to have about $640,000-$800,000 each, of which we’d massively fail at since we only have $350,000 of life insurance each ;) Though it was initially set up to mainly cover our *mortgages* in the event one of us passed pre-kids, so it wouldn’t be a bad idea to reassess here again…

Although isn’t the point of financial freedom to be *fully* sufficient without needing outside help unless you wanted it? We’re far from that point at the moment, but it would be yet another perk if you can start clearing away some insurances since you’d be able to fund a lot more during your demise ;) And not talking about *health* insurance btw – ain’t no way I’m giving up that with our jacked up system here!

Curious though – how many early retirees out there are still carrying life insurance? Why or why not?

(In other fun news  – I recently read that they call it “life” insurance vs “death” insurance because it’s more appealing to see and better odds of people signing up for it, haha… Which is probably true, unless you happen to enjoy thinking about death like some we know! ;))

“Save one-third of the cost of college.”

I’ve never thought of the *ratio* when it comes to saving for college (just always gone with the “save as much as you’re able to” route, and we’ll figure it out later when it gets closer! Haha…), but probably better to have a more developed game plan in place ;)

Per that same article by Kiplinger:

“Under this rule of thumb, you pay for a third of the cost of college from savings, pay a third from current income and financial aid, and borrow a third using a combination of parent and student loans.”

Anyone care to share their perspective or strategy with this who’s in the thick of it all?! Obviously it would be great to have ALL of it taken care of by the time they leave your comfy nest, but we all know it’s hard enough to stay on top of our other massive goals in this Game of Life, so I think if you’re at least saving *something* towards it you’re allowed to be semi-proud of yourself… At least that’s the rationalization I’m telling myself ;)

“You’ll need 70% to 80% of your preretirement income to live on when you retire.”

Oh boy!! The magical retirement number question!! EVERYONE RUN FOR THE HILLS!!! Haha…

You already know what I’m going to say on this one so we won’t linger on it too long, but it’s always fun to refresh ourselves for all the new people to the scene :) And to those people we say, *pay attention to the EXPENSES of your future planning – not your INCOME!* As you can very well be poor with a million dollars hitting you in the face, or rich with $10,000 in the bank – all depending on the quality of lifestyle you want or need later on!

And while we do have a common “rule” here in the FIRE community – 25x your yearly (forecasted) expenses – there’s still ALL kinds of variables you can throw into the mix and tweak to your heart’s desire, so it’s really about finding the starting point that seems best *to you*, and then adapting it as life moves on and changes… And it will always be changing, believe me!

And with that, I’m already feeling a bit re-tired, haha…

Finally a place to insert this meme I’ve been dying to use!!! ;)


What do you think?? Any rules here worth implementing or gonna pass?

Looks like we accidentally hit 2 of the 5 here, but don’t think it’ll be something we’ll be incorporating into our strategies anytime soon…

Always good to hear outside perspectives though!

(Visited 120 times, 1 visits today)

Get blog posts automatically emailed to you!


  1. Dave @ Accidental FIRE May 29, 2019 at 6:07 AM

    As you pointed out and as most mainstream sites do they royally screw up the “what you’ll need in retirement” calculation by basing it on current income and not spending. They just don’t get it. Also the life insurance rule is moot fr folks who are FI or who are getting close

    1. Joe May 29, 2019 at 9:34 AM

      Ugh! When are they going to get real? It makes a lot more sense to base the retirement expense on current spending. Even 120% current spending would work better than what they’re using now.
      I suspect it’s a ploy to keep people working longer. Unfortunately, most working people probably don’t even know their monthly/annual expense. It’s easier to see how much you make.

      1. J. Money May 29, 2019 at 2:55 PM

        You’re right on that last part on “how much you make,” haha… People can recite that in their sleep!

  2. Kate May 29, 2019 at 6:07 AM

    Interesting, just did the math and the value of our home is EXACTLY four times our annual pretax income (brand new numbers due to a new job this month for one and a pay rise last year for the other). I always have been a bit of a rule follower and this time by accident!

    1. J. Money May 29, 2019 at 6:30 AM


      Do you guys feel like you can afford it okay without too much trouble, or is it tight sometimes being on the upper end of the scale there?

      Congrats on the new gig and raises! :)

      1. Kate May 29, 2019 at 7:22 AM

        The VALUE of our home of four times our pretax incomes but the AMOUNT OWING is only [Combined Annual Pretax Income x 1.76]. I was lucky with some previous housing investments, starting young, to be able to put down a 50% deposit when we bought it two years ago. With a fixed interest rate of 1.74% if very manageable. So manageable in fact that we aim to pay the 20 year mortgage off in 10 years. That’s the goal! (I didn’t consider the 50% down payment when I first crunched the numbers on this rule!)

        1. J. Money May 29, 2019 at 2:56 PM

          Holy $hit!!

          50% down and 1.74%??

          Where is YOUR money blog!!! :)

  3. The Crusher May 29, 2019 at 7:25 AM

    I will happily comment on #4 as we have lived it and are still living it. We have two young men who have successfully graduated college with their 4 year Bachelor degrees in the past two years and our 3rd son is a HS junior. Sooooo, we know a thing or two about paying for college.

    Very happy to say that all three of our sons will graduate debt-free. It was a conscious decision on our part to get them started in life debt-free. It was also a costly decision as we project that we will have spent about $400K by the end of this adventure on college degrees. That could buy a lot of ice cream bars!

    In our experience, if you make a reasonably significant income then it is impractical to count on financial aid to cover 1/3rd of the costs of college. You might qualify for unsubsidized student loans that start accruing interest while you are still in college but that hardly sounds like “aid” to us.

    We saved and saved and saved again to pay for college so that our sons would start life debt-free. We did not do so at the expense of our retirement savings but certainly we could have saved more for retirement if we did not save for college as well. We struck a balance and plowed $$ into both. We suggest everyone plan to save early and often for college. Start when they are born. Start that week. Even smaller amounts add up. :)

    1. Financially Fit Mom May 29, 2019 at 8:15 AM

      If you don’t mind 400 questions, because I’m very curious – Did you pay 100% of their college costs or a certain amount, certain areas (tuition and fees only, etc), or something like that? How was their attitude? Do you feel they appreciated it and understood or was it just something mom and dad are supposed to do? How are the two graduates starting out in life – staying the debt free track or living it up with fancy cars and fun parties?

      I ask because as my daughter will be freshman next year, I’m starting all the thoughts on how to discuss college savings with her. She knows I have savings, but I think it’s probably time to start setting her expectations on how she will receive that. I’ve heard many great ideas – offering to pay the cost of an in-state school and they pay the difference if they choose to go out of state, they pay the first semester to have a hand in it and then you pay each subsequent passing semester, just out write dropping the dough for them…

      1. The Crusher May 29, 2019 at 9:43 AM

        Hi Financially fit Mom:

        Your questions are all great ones to ask regarding college. I will try to answer them as clearly as I can.

        We did pay 100% of the 4 years for each son (room, board, tuition) and plan to do the same for son #3.

        Their attitudes were largely very positive throughout the process. They knew fully that we had saved the money for them as we discuss the family finances openly with them. We did set boundaries and made it clear what our expectations were the firmest of which was that they need to graduate in 4 years. We were not interested in paying for overtime. We also let it know early that if they wanted an advanced degree they would have to get a job that would supplement getting that degree. We were not paying for the next level. Both graduated in 4 years.

        I will say that they always sort of appreciated what we were doing for them but they both were 100% appreciative by their senior year of college. It was a learning process. That is when their college friends, some of who were a year or two older were graduating with a boatload of debt. That is when it hit home for them as they saw their friends saying – “I don’t even have a job yet and my student loans payments are starting next month”. That was the true Ahh Haa moment.

        Our sons are actually very financially responsible. Not completely sure how we got them to this point and I will tell you that when they were younger kids you would not have guessed that they would have been so. I do think the fact that we talk about a taboo like money openly has helped shape their attitudes greatly. Each graduate is basically self-sufficient. We are slowly weaning them off the last few parental subsidies (auto insurance and cell phones) to cut them a break but they pay their own way fully. They are 100% debt adverse, are saving for retirement, buying their 1st homes, etc. :)

        When they have thanked us and they have done so many times what we have told them is “no problem – when it is your turn, do the same for my grandkids”. That is thank you enough.

        I will fully admit there is no right answer to how to handle this but this was our plan which we executed fully.

        On a completely selfish note, helping our kids this way has actually paced us in an even better position for FIRE in less than 4 years. The fact that they are self-sufficient is priceless and a key part of our plan. Have to land son #3 and we are good.

        Hope this helps!

        1. J. Money May 29, 2019 at 3:05 PM

          Thank you so much for sharing all this!! Been enjoying this thread!!!

          And what an outcome for everyone! :)

        2. Pete in Toronto May 29, 2019 at 3:34 PM

          If only there were such a thing as a “guest post”, where your sons could write about their experience or be interviewed! :'( [hint, hint! :) :D ]

        3. Financially Fit Mom May 30, 2019 at 8:28 AM

          Very interesting – thank you for sharing more. I think the part that hit home with me on this is setting those expectations ahead of time. Good luck with #3!

  4. Wes May 29, 2019 at 7:49 AM

    Fiance just bought a starter townhome for $72K – that’s about 1.5x our annual gross income – guess we’re ahead of the curve!

    1. Wes May 29, 2019 at 7:50 AM

      Oops, Fiance and I** haha

      1. J. Money May 29, 2019 at 3:07 PM

        Nice price tag too! Great way to start your new lives together over there :)

  5. COD May 29, 2019 at 8:11 AM

    My rule of thumb for college is the kid should not borrow more than he/she can realistically expect to make in their first year after college. Getting a Pharmacy degree with a guaranteed six-figure salary out of college? Borrow what you want because you’ll be able to pay it back quickly. Majoring in history? Calculate the annual income of a Starbucks Barista and that is your debt limit :)

    My son majored in history and borrowed about 14K and lived at home all 4 years of college. My daughter got a near full ride and a fully funded grad school assistantship so she will graduate with a Masters in Animal Science next year with zero debt.

    We live by the 50–30-20 rule, it actually comes from Elizabeth Warren’s book back in 2007 or so. We are running about 45% needs, 25% wants, 30% savings most months.

    I’m pretty sure that life insurance number comes from the life insurance companies :) Like how the 2 months salary for an engagement ring thing was started by DeBeers.

    We just moved into a new rental over the weekend – I still can’t commit to being in Richmond 7-10 years so I don’t want to buy. Zillow calculated I could afford $4000/mo for rent. Technically, maybe, but I got better uses for that money! Our rent is less than half of that number.

    1. J. Money May 29, 2019 at 3:13 PM

      Never heard that rule of thumb on college stuff either! Very interesting! You make it up or read elsewhere because it’s a pretty easy one to follow :) (Although what happens when you change majors like I did and go from business to graphic design?! Haha…)

      1. COD May 30, 2019 at 4:14 PM

        I heard that rule of thumb somewhere, but don’t remember where. I borrowed about $20K for college back when that was 50% of the 4-year cost out of state. So I guess that is like borrowing $100K today. I paid it off in 9-10 years.

  6. Financially Fit Mom May 29, 2019 at 8:23 AM

    I’m not retired yet, but I did nearly let my life insurance lapse this year because my net worth is now greater than our household expenses and what would start my daughter out on a very nice path. However, I kept it. The one thing I’ve wrestled with as I get closer to FIRE is medical insurance. I’ve run some estimates to calculate into my numbers but who knows what that will look like 10 or 20 years from now and who knows what it will look like if we escape to live in some foreign country. I got my life insurance young (unmarried mom, owned a house, had pennies to save; I felt it was the responsible thing to do) so I got a great rate; I have a half million dollars for $220 a year. I realize that statistically, this is probably the same as tossing the $220 into a burning barrel of FIRE (pun intended) but what a fun surprise for my close family and friends if something WAS to happen at a pretty low cost?! That thought keeps me sending the annual payment.

    1. J. Money May 29, 2019 at 3:16 PM

      At rates like that, hell yeah!!! That is crazy low for that much coverage! 50% less than I pay a month and 50% MORE in return too. Rockin’ it!

  7. Fire Year FIRE escape May 29, 2019 at 8:39 AM

    If you work out your savings as a percentage of income it determines your ability to retire really well so it’s incredibly useful.

    I don’t think anyone thinks, “Oh I need to save another 1% this month” though. That would take so much mental math every time you save some money that I would just stop saving :P

    I also just save as much as I can and look back to see how I did for the year. Much easier that way. :)

  8. Christine May 29, 2019 at 8:43 AM

    I was intrigued by the idea of the borrowing for a house being 2-4 times your income idea. I had never seen that, but using just my salary (which was all that was used for loan approval), it’s at 3.5. And we were approved for just over 4–I bet some less responsible lenders would have approved for more, TBH. Factoring in my hisband’s income, we are at 2.5.

    The college thing struck me. I have no kids, which would probably change my tune. And I think listening to Dave Ramsey has gotten in my head, along with just paying off my husband’s loan, but I’d shoot for no studentt debt. I really struggle with the question of value of education. And this is as someone who really loved school in general but as an adult know the financial realities. I had a great college experience at my liberal arts school and learned critical thinking and how to express myself. But I also know that the tuition at my school now is insane. And is it “worth” it? I question whether my Ivy League (la de frickin da) masters was worth it. I borrowed all of what I didn’t get as grants. Yes, I’m in a job I wouldn’t have gotten without it, but did I “need” it? Hindsight is 20-20, but this is the word vomit going through my head when I hear student loan!

    1. J. Money May 29, 2019 at 3:21 PM

      And we appreciate all that word vomit, so do keep it coming :) It’s much more relatable and helpful than reading off boring corporate websites!! Although I think it’s too engrained in me to NOT push my kids towards school (with me/us paying for it) since it’s what my father did for us, and what his did for him…Maybe we’ve been brainwashed, haha, but I guess there could be worse things to believe in :)

  9. Rho | Their Money Goals May 29, 2019 at 10:56 AM

    I’ve heard the life insurance one before. The idea is if you pass, your family could invest the life insurance money and receive approximately the same amount as your salary each year without touching the principal.

    With respect to paying for college, we started as soon as our sons were born but only save a couple hundred dollars each month for each of them while we pay off our student loans. Our ultimate goal is to save enough to completely pay their college costs at a reasonably priced school.

    1. J. Money May 29, 2019 at 3:22 PM

      A couple of hundreds of dollars (each!) is pretty high!!! Don’t you add “only” to that! Haha…

  10. The Cents of Money May 29, 2019 at 11:31 AM

    Linda The Cents of Money

    Your skepticism on the rule of thumb for insurance is well deserved, especially since Kiplinger’s had an earlier article questioning the same.
    No doubt the 8-10x pretax income comes from insurance agents, though I have seen wider numbers 5x-10x so you ride a truck through it. (Or at least, I might be able to!)
    Rules of thumb are a great place to start but a better way may to total up your debt your family may be left with if the working spouse that predominantly pays for loans and family needs were to pass.
    That would include:
    personal debts (cars)
    immediate needs at death
    estimated college costs
    income taxes
    Another way to buy insurance is to look at income replacement, including salary increases and possible bonuses.

    The insurance proceeds can then be invested to keep the family on their feet .

    1. J. Money May 29, 2019 at 3:25 PM

      Yup yup yup – I’m liking what you’re saying here…

      And people tend to forget about the *cost of death* too (burials, etc), so even if you just take care of that for your loved ones it would be one less burden to worry about…

  11. Terri T May 29, 2019 at 12:04 PM

    We’re 2 years from college but our goal is to save enough that we can pay for the rest out of pocket. We make too much for significant financial aid and I don’t see the point of loans. My son is aiming Ivy League so if he gets any scholarships or goes somewhere cheaper we’ll spend less but we’re planning high. We’ll pay for undergrad, after that it’s up to him.

    1. J. Money May 30, 2019 at 1:37 PM

      Smart son!

  12. Nita May 29, 2019 at 1:17 PM

    Only the first one.

    I budget partly by percentage, mostly for allocation of saved funds, and my spreadsheet features every expense as a percentage of my income. In May, living expenses is about 45%, savings 37%, discretionary spending about 18%. So I think I’m good, even though the food budget is a bit too big.

    For the rest, it’s completely off: my home is about 7 times my gross income, I don’t save for college (graduated without debt, and no kids) and so far I don’t have life insurance (no dependants).

    And I don’t aim for that kind of income for FIRE: about half of my current income, plus a paid-off place to live, should be sufficient.

    1. J. Money May 30, 2019 at 1:39 PM

      I think you’re right about that paid off house idea in retirement – that shaves off a ton of expenses that need to be figured in, even though of course they’ll always still cost money…

      good job flipping the saving/discretionary %s around like that! almost 40% is no joke!!

  13. Tara May 29, 2019 at 5:05 PM

    My husband and I each got a half million dollar, 30-year term (which is probably close to 8x our salaries). We also each have 1.5x our salaries though work. We are not as far along in terms of net worth (not quite 6 figures in combined retirement money saved) and we were young/healthy enough at time that we each got around $35 premiums so I felt it was worth it since we are also parents of a toddler. The biggest reason I felt it was important to do this is that for many people, the death of a spouse may also require some time off of work, and if you are not in a great financial place to do that, a large life insurance policy gives the surviving spouse the ability to quit work and still do ok for a bit. But again, if you’re pretty financially set in terms of retirement savings, 2-3x your salary may be enough, especially if there are no kids involved. (also keep in mind though, that the price difference between a $250k and $500k policy may be a few bucks a month, so it may be worth it to get a larger policy).

    1. J. Money May 30, 2019 at 1:43 PM

      Yup – good point on the *time off* stuff, that’s hardly ever considered and you need time to grieve on top of all the logistical nightmare stuff! And I’d imagine half a million will put you at ease pretty well in that department, haha…

  14. LeeAnne May 29, 2019 at 6:34 PM

    I don’t follow the 50-30-20 rule; I budget for all my bills, at least 20% in savings and split the bit left over into savings and a little mad money. For fun, every now and then I do like to run the percentages just to see where I stand. (I also struggle with which buckets items go into – especially the extra money I’m throwinf every month on the mortgage to pay it off faster. Currently, at 27% for housing and utilities (37% when you add in the extra mortgage money), 33% on other stuff “cell phone, paying someone to mow the yard, food, etc”, 25% savings and 5% mad money.
    If you compare what the house cost against my salary when I bought it, I was about 2.5%. Time is usually your friend here – what you owe on the house goes down while hopefully your salary goes up. Therefore, over time, your mortgage because a smaller percent of your check.
    No kids so can’t help with the college stuff. I have 5x salary in insurance which is probably overkill since I’m not married, no kids and I have enough in 401k to cover my debts (which would basically be mortgage and burial costs).
    As for retirement amount, going with 25x expected expenses plus a buffer – not sure what things will really cost 20 years from now!

    1. J. Money May 30, 2019 at 1:47 PM

      You’re sitting pretty over there!! If there’s ever a dating site for financial nerds I think you’d be getting a lot of “likes” or whatever they’re called on them, haha….

  15. Tonya May 29, 2019 at 8:01 PM

    That college one seemed absurd to me. ZERO percent of college funding should come from parent or student loans. That is a TERRIBLE idea. I like the idea of 75-100 percent coming from saving/investing and maybe 25 percent from current income. Just my perspective as we STILL make payments on my husband’s f*@^ing student loans.

    1. J. Money May 30, 2019 at 1:49 PM

      The whole industry is def. getting out of hand :(

      Although I just heard that a handful of schools in Virginia are freezing tuition for the next year, so maybe it’ll be the trend to help at least pause things for a bit?!

      1. Tonya May 30, 2019 at 9:52 PM

        Definitely out of control. What other industry would make 5 or 6-figure loans to someone with little to no income. It is worse than the zero down mortgages pre-2008. As a country, we have learned NOTHING.

  16. Jennifer Cook May 31, 2019 at 5:27 PM

    We began saving in a coverdell and then a 529 plan for my daughter when she was an infant. 10 years later we stopped saving for her college. We had lost money in the market during the downturn, both in her college fund as well as our retirement funds. We decided we needed to aggressively save and secure our retirement first. The idea that my daughter would attend an out of state elite school is a pipe dream for us and unless she earned a full ride for herself, it just wasn’t going to be.

    Interestingly, we have about a third of what her college bill should be if things stay the same and that should cover the expenses (we really, really hope :) We live in a state where they offer steep discounts for public universities based upon SAT scores. If a child scores very high they get 100% of tuition paid for; if they score well (which is where most kids fall) the tuition is 75% covered. She also plans to take dual enrollment so she will earn 1-2 years of college for free as a high school student. This would leave us to pay 25% of 2 years of college. If it turns out to be more than that we will cut back on extras and pay as we go, our daughter will also work and I will look for a side hustle if necessary. I had felt that the cost of college for our situation was overestimated. I didn’t want to over save and then be forced to use the saved money on education that we may not have to purchase. Another idea to save money on college is through CLEP testing.

    1. J. Money June 3, 2019 at 1:34 PM

      Very cool state perk!! Never heard of that before!

  17. Juniper June 3, 2019 at 8:17 AM

    Right after the doctor showed us our twins, “it’s a boy… It’s another boy”, we whispered to them, “by the way, there won’t be any money for university”. Neither of us had parents who paid, nor any of our friends. We all worked to pay. University and college are sadly much more expensive now (even in relative terms) but our boys are graduating this year and taking a year or two to work while they decide what to do next. A lot of their friends are heading off to “try something out” at enormous cost to their future selves. I would rather encourage them to spend their money travelling for a few years! It took me at least ten years to figure out what I thought I wanted and now I still can’t decide… My daughter is twenty one and has been working since she quit school in grade 11 to tour with her band (she finished by correspondence with honours). She’s thinking of sellng her car to take a few courses at university this fall.

    I guess what I’m saying is there are many paths.

    1. J. Money June 3, 2019 at 1:35 PM

      Indeed… Love that she went on tour with her band though – that takes all kinds of risk! Bet it was so thrilling as hell too :)