Rules of Thumb

[wvhillbilly]

Sorry if this is already posted up somewhere and I missed it.

I am a personal finance newb, curious to learn more about these easy guidelines to success.

I understand the Emergency Fund rule of thumb is 6 months of expenses.

15% of income put into retirement? Is this Gross income or take home? Do I count my 401k company match in my 15%? Do I count my pension?

Is there a vacation budget % rule of thumb? How much car can I afford?

Other than the 20% down payment and 15 year mortgage rule, what is the suggested % of income to tell how much house I can afford?

If you just want to post a link or suggest a book to read as an answer that'd be good

Thanks

[Nutria]

I understand the Emergency Fund rule of thumb is 6 months of expenses.

Meh. Are you the sole breadwinner? What's the job market like where you live?

15% of income put into retirement?

If you can swing it.

Is this Gross income or take home?

Net of taxes and insurance. (You don't actually *see* your gross income.)

Do I count my 401k company match in my 15%?

I guess you could, but that's relying on someone else for your future.

Do I count my pension?

In 2016, pensions are as secure as Saddam Hussein's bunkers. Rely on yourself.

Is there a vacation budget % rule of thumb?

Why should there be?

How much car can I afford?

Wrong question.

Right question: how much vehicle do I need?

Other than the 20% down payment and 15 year mortgage rule, what is the suggested % of income to tell how much house I can afford?

The standard debt-to-income formula is that your housing payment should be around 30% of your gross monthly income, and that your total debt payments (based on minimum CC payments) should be no more than 38% of gross.

These are serious flaws which are guaranteed to put you permanently on the edge of catastrophe.

Buy less house than "they" say you can afford (you'll have more money for savings and "other" stuff like children), and get a 30 year mortgage.

You'll pay a slightly higher rate with a 30 year loan, but the lower mandatory payment will be a boon when/if you run into financial difficulties. In the meantime, just make sure that you can prepay the loan, and -- while you have the extra money -- pay the 30 year mortgage like it's a 15 year mortgage.

[phantom]

I'm not a fan of rules of thumb myself. I think it's better to really give some thought to what you're doing with your money and why. Rules of thumb are better than nothing if you don't want to think much about your money, but since you're interested in learning, I suggest you go a bit deeper.

For an emergency fund, I've heard 3, 6, and 12 months of expenses. If one of the purposes of your emergency fund is to protect yourself against loss of income, I think it's definitely a good idea to consider how long you are likely to go between jobs and how much money you'd need to cover that time frame. But, keep in mind that if you have a spouse with an income or can count on unemployment for awhile, you might not need as much. Also keep in mind that there are emergencies other than loss of income to save for, like health care expenses, home repairs, and car repairs. If your expenses are low and new jobs are easy to find, three months of expenses might cover job loss but not the sudden need to replace a car.

For retirement, the rule I've heard most often is 15% of gross not counting a match. But, I think retirement savings is one of the worst possible places to just blindly follow a rule. People start saving for retirement at different ages, want to retire at different ages, and want to spend different percentages of their salaries in retirement. There's no way saving a certain percentage could cover all those variables. But, if you can decide when you want to retire and how much you want to spend in retirement, you can tell a retirement calculator where you are now, and it can tell you what you need to do to reach those goals. It can be hard to guess when you'll want to retire and what you'll want to spend in retirement, but I'd rather save based on my own guesses than the guesses built into a one-size-fits-all rule.

I would only count the portion of your match that is vested towards your retirement savings. You never know what might happen that would cause you to leave your job before you're fully vested. As for your pension, whether or not I would count that would depend on how strongly I believed it would be there when you retire. In general, I like to save for retirement such that if most everything goes wrong, I'll be okay in retirement, and that if everything goes right, I'll be very comfortable.

[amastewa93]

I think that everyone's financial situation is different. Of course, some people will be able to save more than others because that are making more.

My uncle, for instance, doesn't have a dime of debt and will retire before he is 55 years old. My mother (his sister) will likely work until the day she dies and has debt up to her eyeballs.

I have learned from my mom, and I put a set amount ($200) every other week into savings. I also put some into investments through Acorns, and I will likely set up an IRA in a couple of years (I'll be 23 at the end of the month). Whatever is left between paychecks I put into savings. It has gotten to the point that I don't even realize it is payday.

[autoxer]

15% of income put into retirement? Is this Gross income or take home?

If you contribute 15% of your income, earn 5% after interest on your investments and continue that for 40 years, then you will have a nest egg large enough to live off indefinitely, assuming a 4% safe withdrawal rate. It's really tough to plan your retirement when you don't know how long it is going to be, but I'm planning for an early and long retirement, so I've been contributing more than that rule of thumb.

Wrong question.

Right question: how much vehicle do I need?

Amen. It took me a while to figure that out. It turns out I don't need a turbo and AWD, but those things sure were fun.

[Nutria]

It turns out I don't need a turbo and AWD, but those things sure were fun.

At some points (young, not middle aged) in your life, you actually do "need" cool, aggressive, manly stuff. And that's ok. (Consider it part of your entertainment budget category...)

Just don't overextend yourself, and grow out of it before you get too deep in debt...

[LivingAlmostLarge]

Rule of thumbs are just averages because everyone's situation is different. Military can retire after 20 years with 50% salary. Do they need to save as much? Probably not.