Financial Rules of Thumb to Consider Breaking
Financial rules of thumb circle around the internet like flotsam caught in an eddy. We scrutinized five particularly persistent ones to see how they hold up. Our conclusion: Most have merit as a starting point for setting a financial goal. But depending on your personal circumstances, you may benefit from bending the rules.
Budget
Spend no more than half of your income on living expenses, keep discretionary items to 30%, and save the rest.
In her 2005 book, All Your Worth: The Ultimate Lifetime Money Plan, Elizabeth Warren, then a Harvard professor, presented "the balanced money formula," which has since been popularized as the 50/30/20 rule. Under this rule, you allot 50% of your take-home pay to "must haves," 30% to "wants" and 20% to savings.
Must haves include housing, utilities, medical care, insurance, transportation, child care and minimum payments on any legal obligations, such as student loans, child support or anything for which you've signed a long-term contract. Why only 50%? Warren says it's sustainable, leaving you with plenty of money for the rest of your life, including fun and the future. When things go wrong, you may be able to cover the basics with an unemployment or disability
