01 Jul 2022

Making Cents: Personal finance rules of thumb - Liam Croke

Making Cents: Personal finance rules of thumb - Liam Croke

Financial rules of thumb can be useful because they are a quick and easy reference people can refer to which can help give them a steer and a guide in the right direction when it comes to making decisions about their finances.

Having said that, no two people are the same, and I believe there are no one-size-fits-all rules for running your budget, savings, pension, debt, or other aspects of your financial life. However, there are some tried-and-tested rules that are particularly good, and I’m going to outline 13 of them that I think could be helpful for guiding your financial decision-making.

The 30-34-39, Mortgage 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, Emergency Fund Rule

This rule of thumb suggests you should have:

3 months of your 7 biggest monthly expenses for a two-income household where both are in what they perceive to be stable, secure jobs.

6 months of your 7 biggest monthly expenses for a single income household where the income earner is in stable, secure employment

9 months of your 7 biggest 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 your 7 biggest expenses if you are self employed

The 30%-40x, Rent Rule

This rule suggests that, like any mortgage repayment, amounts paid on rent shouldn’t exceed 30% of your net monthly income.

Which also means that your net annual income should at least be equal to 40 times the cost of your annual rent i.e. 40/12*100 = 30%.

The 20/4/10, Car Purchase Rule

This rule advises 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

The Age x Annual Income/10, Net Worth Rule

This rule of thumb, or perhaps it’s more like a formulae was developed by Thomas Stanley and William Danko. They developed a method to calculate what our net worth should be and it is:

Multiply your age times your gross annual income and divide by 10 and that’s what your net worth should be.

The 50/30/20, Monthly Budget Rule

The premise of this rule is simple, your net monthly income should be split into three separate groupings with a % of your income devoted to each, and they are:

50% to the must haves which included things like your mortgage, rent, utilities, groceries, insurances, transportation, clothing, loan repayments.

30% should be set aside for your wants which is discretionary spending, so everything you want, but don’t necessarily need i.e. eating out, holidays, entertainment etc.

20% to be set aside that will go towards savings, investments, debt reduction and retirement.

The 25/300, Retirement Fund Rule

The general rule of thumb when it comes to determining how much you need in your retirement fund is found with this rule, which is more commonly known as the Rule of 25.

And this is where you multiply the annual amount you need each year in retirement by 25.

Or you could multiply your monthly expenses by 300 and you’ll arrive at the same number.

The 0-10-7-5, Life Assurance Rule

This is the, how much life cover should I have rule?

So, if you are single, 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 30s 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 50s.

The Rule of 72, Savings & Investments

This is the how long will it take before my savings double in value rule?

So, if you divide the interest rate you are receiving on your savings/investment into 72, this will reveal the number of years it will take before your money doubles in value.

The 110 – Your Age, Pension Equity Fund Rule

The 110 rule is based on subtracting your age from 110, and that’s the amount you should hold in equities 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%, Home Maintenance/Improvement 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.

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.

Save Your Age, as the % of any Salary Raise Rule

Developed by the financial services giant, Morningstar, this is one of three rules they suggested when it comes to any salary raise you receive and how much of it, you should save.

So, if you are 30 save 30% of your raise, if you are 40, save 40% and so on.

The 2%, get out of Debt Rule

At the heart of the 2% rule is gradual change, something that can be achieved and maintained.

How the 2% rule 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 to your debt or your savings account.

Let’s assume your monthly outgoings are €3,000. The target amount you are going to set yourself to spend next month is €2,940, so you are looking at spending €60 less which is 2% of €3,000.

You may not meet your target every month, and that’s okay if you don’t. But your goal is always to spend 2% less than you did the month before.

At the heart of this plan is to use those 2% monthly savings in an effective way. And that could be paying off credit card debt, adding to your savings fund for a holiday, or for whatever reason is most important for you.

In summary, and I’ll repeat myself, rules of thumb are useful and they can be a great reference point, but they shouldn’t be solely relied upon for making financial decisions. For sure, they can assist you but nothing better than developing a sound strategy that encompasses everything that is unique to you right now and potentially for several decades ahead as well.

Liam Croke is MD of Harmonics Financial Ltd, based in Plassey. He can be contacted at or

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