You’re supposed to follow these 3 popular money rules—but then there’s the reality of life

- Advertisement -

This Article reprinted with permission of nerdwallet,

- Advertisement -

Take 20% down when buying a home. Don’t spend more than 30% of your income on housing costs. Keep childcare expenses below 10% of your annual household income.

- Advertisement -

These money rules of thumb can be useful handrails, helping you allocate expenses and determine what’s affordable. They can also be incredibly defeated when they feel unattainable.

If the money “rules” feel completely different from your reality, know this: The average American doesn’t come close to meeting many popular money rules. And that’s fine.

- Advertisement -

“If you treat ‘rules of thumb’ as hard rules, you’re setting yourself up for frustration,” says William O’Donnell, president of Heartland Financial Solutions in Bellevue, Nebraska. “What people forget is that guidelines are flexible because everyone’s situation is different.”

What is important is to take control of your expenses and create an expenditure plan that works for you, not an ideal one. Here’s how to look at money rules of thumb in the context of your personal financial reality.

Rule: Budget 50% for needs, 30% for wants, 20% for savings

Reality: Housing alone can eat up half of your take-home pay

50/30/20 Rule There is a popular budgeting structure that divides after-tax income into three buckets: needs, wants and savings. But paying expenses before you even started can drain that budget.

In 2020, for example, 23% of US renters spent half or more of their income on rent alone, according to the latest data from the US Census Bureau. Add in other needs – utilities, groceries, transportation, insurance, child care and loan payments – and there is little, if anything, left over for wants or savings.

Reading: Another sign of an impending recession? Americans’ ability to pay bills on time fell for the first time in 5 years

Don’t cancel your budget if the buckets don’t work. Instead, adopt the principle and adjust the structure keeping in mind your current financial situation where you want to live long term. Sure, it might be over budget for 85/10/5 right now, but over time you can move closer to your ideal balance.

Simply keeping track of all your expenses is a good start; You’ll see where each dollar is going and you can make more informed decisions about your spending.

Rule: Limit child care expenses to 7% of your income

Reality: Most families spend 20% or more on child care

The U.S. Department of Health and Human Services considers no more than 7% of your annual household income spendable on child care.

But according to a 2022 survey by, 51% of parents spend more than 20%, with more than 3,000 parents paying for child care.

There are things you can do to dramatically cut child care costs, but there may be discounts and scholarships available, depending on your state and child care status.

care of a dependent flexible spending account There is another option. If your employer provides it, you can contribute up to $5,000 pretax and use the money to help pay for nanny, day care, after-school care and summer camp registration, among other things.

Childcare costs rising as parents prepare to return to the office

Rule: You need a 20% down payment to buy a home

Reality: First-time home buyers typically put down around 7%

The 20% down payment “rule” is out of date, says Jessica Lutz, vice president of demographics and behavioral insights at the National Association of Realtors.

“The typical first-time buyer puts down just 6-7% for the down payment,” Lutz says.

Yes, lenders once required such a large down payment, but they now rely on private mortgage insurance, or PMI, to hedge their risk, passing the cost on to borrowers.

According to Genworth Mortgage Insurance, Ginny Mae and the Urban Institute, home buyers who pay an average of 0.58% to 1.86% less of the principal loan amount per year for PMI. It Could Add Hundreds of Dollars to You monthly mortgage payment,

Keeping more money upfront lowers the monthly and overall cost of your mortgage, but freeing up your savings to buy a home can leave you on shaky financial grounds.

Roughly 3 out of 10 homeowners (29%) no longer feel financially secure after purchasing their current home, according to a 2020 survey conducted by Harris Poll for NerdWallet. This sentiment was most intense among young homeowners, with 42% of millennials and 54% of Generation Z homeowners feeling financially insecure after purchasing their home, compared to 31% of Generation X and 16% of Baby Boomer homeowners.

House hunters say they are ready to buy in the next six months – even in a downturn. Why over here

A mortgage broker can run the numbers to help you figure out the sweet spot for your down payment, says Lutz, but you also need to ask yourself some questions.

“Do you need money in savings for a home remodel, or backup savings for other expenses?” she says. “Would it be easier to have a lower monthly mortgage payment for student loans or other monthly expenses like child care?”

More from NerdWallet

Kelsey Sheahy writes for NerdWallet. Email: [email protected] Twitter: @KelseyLSheehy.

Credit: /

- Advertisement -

Recent Articles

Related Stories