Financial Rules of Thumb

5 min read
December 12, 2017
Financial Rules of Thumb.pngDo you find it difficult to sort through all the "expert opinions" and confidently know how much to save for retirement, how much debt is appropriate, or how much to set aside in savings for emergencies? You are not alone. To make life easier, Mellen Money Management created a list of benchmarks that can be useful for anyone looking for general guidance on whether or not they are on track financially.


Most of us need more specific direction than a set of arbitrary rules that say you have to save 10% in order to be successful in retirement. My experience with clients has shown that individuals and families often share a common thread when it comes to their types of goals, but the solution to those their problems requires more customization. Why? The answer is simple. We are all human. Humans are very complicated creatures and therefore we frequently require specialized experts, like a doctor, to understand our problems, relate to our needs, and translate complex issues in a way that allows us to make our lives better.

The reality is our emotions frequently drive the decisions we make, and those decisions are sometimes not the most rational. That emotional complexity is further compounded by the fact we all have varying levels of access to financial resources, with differing ideas on how our resources should be used. Situations really begin to get overwhelming when our goals start competing for the same limited number of resources. The stress that follows is often what leads to irrational behavior.

Consequently, the further we drill down into our personal money issues, the problem solving required to meet our needs becomes a lot more complicated than any general guidelines can provide. The various financial trade-offs that are at odds with each other might mean a person cannot afford to achieve every rule of thumb. Additionally, some of us may need more or less than what is generally prescribed. This is where an objective and competent financial expert will bring clarity. Such an expert, whether it be a friend or an advisor, increases your odds of successfully achieving financial independence.

Without further ado, scroll below to review the Financial Rules of Thumb and use it as a way to benchmark your progress, but remember it's not the end all be all.


  • The 50/30/20 Rule
    • Spend 50% of your income on needs, like housing and bills
    • Spend 30% of your income on discretionary wants, like travel and hobbies
    • Save 20% of your income for financial goals
  • Save at least 10% of income for retirement
    • 15% is ideal to ensure a secure retirement
    • Whenever 10% is too much, start off small at 5% and increase incrementally by 1% every 6-12 months until 10% - 15% is achieved
  • Emergency Fund = 3 months of living expenses at a minimum
    • 6 months for less stable incomes or retirees
    • 12 months for nervous types


  • Total of All Debt Payments = 36% or less of monthly gross income
    • Mortgage, car, credit cards, and student loans
    • $100,000 Income Example -- maximum debt payments = $3,000/month 
  • Housing Payments = 28% or less of monthly gross income
    • Applies to owners and renters
    • For owners be sure to include: mortgage, property taxes, homeowners insurance, association dues, and private mortgage insurance (PMI)
    • $100,00 Income Example -- maximum house payment = $2,333/month
  • Consumer Debt Payments = 20% or less of monthly take-home income
    • Includes car, credit cards, student debt, and other
    • $100,000 Income Example (FL Res.) -- net pay = $81,861 --> maximum consumer debts payment = $1,364/month
  • Total Student Debt < Annual Gross Income
    • Coming out of school, a graduate's student debt should be less than their annual salary
    • Whenever the total student debt amount exceeds annual income, the borrower should strongly consider using an Income-Driven Repayment (IDR) plan -- IBR, PAYE, REPAYE


  • 100 - your age = Percentage of Investments to Allocate in Stock
    • Example -- a 40-year old should have 60% in stocks and 40% in bonds and cash
  • At least contribute up to the company match in your 401(k) plan
    • If a company matches 50% up 6%, by following this rule you are getting a total contribution to your retirement of 9%
  • Limit concentrated stock ownership to 10% of investable assets, especially at retirement
    • $500,000 in CSX Railroad Example 
      • A 35% decline similar to what happened in 2016 is a loss of $175,000
      • A 63% decline like what happened in 2008 is a loss of $315,000


  • Retirement income should be 80% of your pre-retirement income
    • Lifestyle dependent
    • Some people spend more when they retire because they want to travel
    • Other may spend less because the mortgage is usually paid off
  • 4% of investments is a safe withdrawal rate to avoid running out of money
    • Highly dependent on retirement age, longevity expectations, risk exposure, and investment performance
    • Bad timing with investment returns relative to when you retire also has an impact
  • It's always better to delay taking social security
    • True for retirees who have longevity in their family
    • Not true for retirees with lower than average life expectancies


  • Life insurance coverage = 6 - 8 times your annual income
    • $150,000 Income Example 
      • 6x Salary = $900,000
      • 8x Salary = $1,200,000
  • Long-term care insurance coverage is an appropriate asset protection strategy for those with a net worth between $200,000 and $2,000,000
    • Anything below $200,000 and Medicaid planning is probably a better alternative
    • Long-term care is best used for low to moderate incomes with a lot of assets to protect
    • The average stay for a man is 1 year and the average for a woman is 1.5 years
    • 70% of people who reach age 65 will eventually need nursing care, however, according to the Center of Retirement Research 50% of men and 39% of women will only stay in a facility for 90 days or less
  • Minimum auto policy coverage
    • Liability per Person = $100,000
    • Liability per Accident = $300,000
    • Property Damage = $50,000

This article originally appeared on Mellen Money Management LLC

scott snider.jpgAbout the Author

Mellen Money Management is a fee-only financial planning firm that services the Jacksonville, FL and Columbus, OH markets and works with clients across the country regardless of location. Having spent much of his career advising $44-million in client assets for a large regional bank, founder, Scott Snider, broke away to start Mellen Money Management. Scott began with the idea of providing clients conflict-free advice, with an emphasis on life transitions and how those key moments impact investible assets and household finances. As a CFP®, Scott offers full-service financial planning to his clients. However, with the astronomical spike in the cost of college, Scott wanted to be a part of solving the problem. This led him to develop a specialized expertise in the area of college planning. Scott helps individuals and families navigate the many hidden pitfalls rife with the cost of college -- a very expensive proposition for anyone lacking a proactive plan. Most planners show clients how to save for college, unfortunately, most do not offer solutions towards reducing out of pocket expenses, both in terms of financial aid packages and student loans. Thankfully, Mellen Money Management does!

Do you know XYPN advisors provide virtual services? They can work with clients in any state! View Scott's profile