I’m not a huge fan of lots of the rules of thumb you see in personal finance all the time. Rules like:
– Emergency funds must be 3-6 months of living expenses in cash
– Housing shouldn’t be more than 30% of your income
– You should spend 50/30/20 on needs/wants/saving
– You should be able to comfortably live off 4% of your investments in retirement (the 4% rule)
– To know how long it will take to double your money, divide 72 by your rate of return (the rule of 72)
The reason?
Reality.
Rules like these are not super practical and not at all personal. They’re too theoretical and they don’t take your circumstances into account.
If you’re regularly investing money each month, you’ll double the amount you have invested a lot faster than the rule of 72 tells you.
The 4% rule doesn’t take into account whether you have a home paid off or not, what you’ll be receiving from the government, what the market conditions are like, or what kind of lifestyle you’re hoping to lead. It also falsely implies that you should be withdrawing the same amount every year.
Lots of the rules around spending on housing are a joke for people living in expensive cities, and for those living in cheaper areas, there’s no reason to spend more on housing just to hit some number.
The rate at which you’re saving should depend entirely on your income and your goals.
For emergency funds, it depends on your comfort level, whether you have access to money in a HELOC or a Whole Life policy, whether you have a family, what kind of disability coverage you have, and so on.
Even worse, all these rules tend to make people feel bad about their own situations. As if everyone else is following the rules perfectly. As if they should feel ashamed if they’re spending too much or not saving enough.
Sometimes a general rule can be a useful guide or a way to benchmark or get a sense of where you’re at. And if they serve some purpose that’s great.
But lots of the time they’re counterproductive. They mislead and oversimplify, get in the way of people making progress, and fail to grapple with reality.
Start where you are. Take steps toward where you want to be. Measure success based on your own goals, not general rules of thumb that may or may not apply to you.