Making Cents: Sixteen handy rules of thumb

FINANCIAL rules of thumbs are quick and easy reference points that people can refer to when it comes to making decisions about their finances.

They’re useful because when someone begins making an assessment about a particular area, they can measure their numbers and how they stack up against what’s perceived as the optimum number based on a particular rule.

What rules of thumb don’t know however, are the factors that are unique to an individual’s personal situation. And obviously no two people are the same, and what one rule says is right for one person may not be for another, so they shouldn’t be exclusively relied upon for making important financial decisions, but I think they are a good guide, nonetheless.

And there are many of them, far too many to include all of them in one article so I decided to pick 16 rules that I thought people would find useful and interesting, and they are:

Rule of 30-6
This rule states that you should spend at least 30 minutes every month reviewing your finances or a minimum of 6 hours every year.

Whether that’s’ reviewing your monthly cashflow or reviewing how your savings are performing or checking in to make sure any insurance and assurance premiums remain competitive and so on.

Rule of 15-70-4
This rule is with reference to retirement, and it states that you need to save 15% of your income each year if you’re aiming to replace 70% of your pre-retirement income.

And when you’re in retirement, withdrawing 4% of the value of your fund is considered the safe withdrawal where it’s unlikely you’ll outline your fund at that rate.

Rule of 10
This rules states that before you make any big purchase, you should reflect on how that purchase will make you feel in 10 days, 10 weeks, or in 10 months.

It’s thought that perspective can calm buying urges that you later regret, which is why taking time out before you complete a purchase is considered worthwhile.

Rule of 1-100
This is somewhat related to the Rule of 10, but this rule suggests that you give yourself a cooling off period equal to 1 day for every €100 of the purchase cost.

You can change the €100 amount to whatever amount you feel is big for you, so it could be the 1/50 rule for one person and the 1/300 rule for another.

But the premise stays the same, and if we stick to the 1/100 number for a moment, it means if you are buying something costing €300 then give yourself 3 days before you buy it and then see if you feel the same way as you did when you first saw it.

Replace Your Car Rule
This rule states that you should replace your car if the cost of repairs is either:

(a) greater than the value of your car or

(b) if they’re more than one years’ worth of your car loan repayments.

Rule of 25
According to this rule, you’ve achieved financial freedom when your savings reach 25 times’ your annual expenses.
So, if your annual spending is €20,000, then you’ll reach financial freedom when your total savings amount to €500,000.

40-30-20-10 Rule
This rule is in relation to saving and spending and is a useful guideline where people can divide up their income and allocate it into different areas.

It suggests 40% of your income goes towards necessities i.e. rent, mortgage, utilities, food etc. and 30% goes towards discretionary spending i.e. eating out, entertainment etc. 20% towards savings and/or paying off debt and 10% is used towards guilt free fun spending.

And there are many variations to this rule i.e. there’s the 50-20-30 rule and the 70-20-10 rule and many others all of which suggest you apportion a different % to the amount you spend on this essential and discretionary and savings areas.

And whilst all offer a simple and easy to follow guide, the %’s they suggest won’t suit everyone and therefore you shouldn’t strictly follow any of the %’s outlined, they are for guideline and suggestion only. The 40-30-20-10 rule for you could end up being something like 60-20-15-5 for someone else.

The benefit of following rules like this one is to help you separate out the amount you spend each month in a controlled and easy to follow way where the ultimate outcome is to help you live within your means.

The 0-10-7-5 Rule
This is the, how much life cover should I have rule?

And it suggests that if you are single, and in your twenties and nobody is financially dependent on you, you need 0 times your salary, because you don’t need any life cover.

If you are in your 30’s with young children then you should have 10 times your annual salary, if you’re in your 40’s when children might be a little older its’ 7 times your annual salary and 5 times if in your 50’s.

The 110 Rule
The 110 rule is based on subtracting your age from 110, and that’s the amount you should hold in equites in your pension fund, with the remainder going towards other classes.

So, if you’re 40, your asset split should be 70% in equities with the other 30% being distributed to cash, government and corporate bonds, property, commodities etc.

The 1% Rule
This rule states that you should set aside 1% of the value of your home for ongoing maintenance and improvements.
So, if your house is worth €450,000, you should budget €4,500 each year for maintenance.

This figure, or any figure doesn’t mean you are going to spend that amount every year, some years you will spend less and other years you will spend more, but on average and over 10 years, this is the average amount you might average out spending each year.

There is a second rule of thumb when it comes to this area and its’s related to the square footage of your house.

The rule suggests that for every square foot you should be setting aside €1 for maintenance and repair costs. So, if your house is 1,800 sq. ft then you need to be budgeting for an average annual cost of €1,800 over the long term.

The Salary Raise Rule
Developed by the financial services giant, Morningstar, they suggest that when it comes to any salary increase you receive, the amount you save is directly linked to your age.

Which means that if you are 30, you should save 30% of your raise, and if you are 40, you should save 40% and so on.

The 2% Rule
This rule is all about getting out of debt quicker.

How it works.

First off, track your outgoings for 1 month.

Once you know how much you spend and on what, the following month you are going to reduce your outgoings by 2%.
You then apply the 2% saving as an extra payment against your normal monthly loan repayments.

The 30-34-39 Rule
This rule suggests that mortgage repayments should not account for more than 30% of your net monthly income, 34% when you include other associated housing costs and 39% when you factor in the mortgage repayment, associated costs, and any other loan repayments.

The 3-6-9-12 Rule
This rule of thumb is based on the amount you should hold for emergency purposes should you need access to money if you were made redundant or were unable to work due to an accident or illness.

The rule says you should have saved:

- 3 months of monthly expenses if you’re in a two-income household where both are in what they perceive to be stable, secure jobs.

- 6 months of monthly expenses for a single income household where the income earner is in stable, secure employment.

- 9 months of monthly expenses for a two-income household where both are in what are considered unstable jobs or the industry, they work in is prone to volatility/redundancies.

- 12 months of monthly expenses if you are self-employed.

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The 30% and 40-times Rule
This rule suggests that when it comes to renting, you shouldn’t spend more than 30% of your net monthly income and/or you should have earnings that are at least 40 times’ your monthly rent.

And if you use either number, you’ll arrive at the same number e.g. €1,300 x 40 = €52,000 and €52,000 x 30%/12 = €1,300.

The 20-4-10 Rule
This rule refers to buying a car and it’s guideline numbers suggest that you should have a 20% deposit, a loan that doesn’t last longer than 4 years and a monthly repayment that is not greater than 10% of your monthly income.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at liam@harmonics.ie or www.harmonics.ie