Written by Gregory Palacorolla, CFP ®

We live in a fast-paced world with unforgiving schedules and unfortunately, limited time for deep dive analysis when it comes to our personal lives. As a result, sometimes rather than build intense data-laden spreadsheets, we choose to utilize general rules of thumb when making our financial decisions. Financial rules of thumb are not precise and don’t always hold true. But they’re viable markers to which we can build flexible plans around. Of course, there are times when generalizations and educated guesses cannot replace precision and accuracy. However, if we look to these rules of thumb as guidelines, with the ability to tweak along the way, trading some precision for time seems an acceptable starting point to employ. Keep in mind that rules of thumb in no way replace the value working with a financial advisor brings. Financial advisors know how to apply these rules of thumb to your specific situation and determine if changes need to be made for them to align with your overall goals and plan.

Can I Retire?

Multiply current annual expenses by 25. If the figure is less than your savings, it may be feasible for you to do so.

How Much Can I Withdraw in Retirement?

A general rule of thumb says that a retiree can withdraw 4% of their investments in the first year and increase that amount by the rate of inflation (many use 4%) in subsequent years.

How Much Should I Have Saved by Now for retirement?

Fidelity suggests that you aim for:

  • 1X your salary by age 30
  • 3X your salary by age 40
  • 6X your salary by age 50
  • 8X your salary by age 60
  • 10X your salary by age 67

Factors that will impact these savings goals include the age in which you plan to retire and the lifestyle you hope to have in retirement.

How Much Should I Start Applying to Retirement Savings Per Month?

When you first start out, a general rule of thumb is to apply 15% of your monthly income towards your retirement savings via a 401(k) or IRA.

How Much Should I Be Saving for My Emergency Fund?

Many experts reference 4-6 months of expenses as an acceptable amount stashed away for an Emergency Fund.

Should I Buy a House or Rent One?

The Price to Rent Ratio (P/R Ratio) is helpful in determining this. Divide the sale price of one by the annual rent for the other. For example, take a $300,000 house for sale vs. a similar home for rent for $1,800 month ($21,600/year). Divide $300,000 by $21,600 and you get a P/R Ratio of 13.8. If the P/R Ratio is over 15, the renting option may be the better choice.

How Much House Can I Afford to Purchase?

Strive to put down 20% to ensure you don’t spend more than you can afford and this way you can lower your monthly mortgage costs. Do not buy a home that costs more than 3X your annual salary. Strive to keep housing expenses no more than 25% of your income after taxes. Divide your monthly take-home pay by 4. This is the amount of monthly mortgage payment you should strive not to exceed.

Should I Repair or Replace Appliances?

With regards to appliances, if it is more than eight years old or if it would cost more than half of what it would take to buy a new one, Consumer Reports suggests buying a new appliance.

How Much Should I Have Saved for My Child’s Education?

Fidelity suggests using the “College Savings 2K Rule of Thumb.” Multiply your child’s age by $2,000. This amount is how much you should have saved by now for their college education. (This assumes a 4-year public college and that you only save 50% of the total cost for college).

How Much Do I Need for Life Insurance?

Determine how much your spouse or partner needs in income and multiply that by 25. Many recommend that a life insurance death benefit provide a lifetime income of 4% multiplied by the death benefit.

How Much Can I Afford in a Car Payment?

The 20/4/10 general rule of thumb is often applied. Put down 20%, finance for no more than 4 years and don’t spend any more than 10% of your income on transportation costs.

How Quickly Can My Invested Money Grow?

This depends on many things: timing, the amount contributed, investments selected, etc. Stocks average rate of return is 7%, but this can obviously be higher or lower based on the factors listed above. Bonds tend to hover around 2.5%. A well-invested portfolio has the potential to double in value every 10 years or so. If you want to have $1 million by retirement, then a rule of thumb is to strive to have $500,000 about a decade prior to retiring.

How Much Can I Borrow in Student Loans?

Many use the “First Year Salary Rule,” which means you don’t take out more in student loans than you expect to earn during your first year working.

How Much of My Money Should Go Towards Spending vs. Saving?

“50/30/20 Rule” for spending and savingBankruptcy expert and U.S. Senator from Massachusetts, Elizabeth Warren created the “50/30/20 Rule” for spending and saving. First, you start by calculating your after-tax income. If you are an employee, this is what remains of your paycheck after taxes are taken out (state, local and income tax, Medicare and Social Security). Add back in healthcare costs, retirement contributions, or any other deductions that are being taken out. If you are self-employed, this number is simply your gross income minus your business expenses and the amount you set aside for taxes.

  • 50% of this after-tax income goes towards “needs” (housing, utilities, groceries, insurance, auto loans)
  • 30% of this after-tax income goes towards “wants” (shopping, dining out, entertainment)
  • 20% goes towards “savings”


Sources: The Balance/ Motley Fool/ Kiplinger/ Forbes

© Geier Asset Management, Inc. April 2019. Gregory Palacorolla, CFP ® is Director of Wealth Management for Geier Asset Management, Inc., a Registered Investment Advisor. The articles & opinions expressed in this material were gathered from a variety of sources, but are reviewed by Geier Asset Management, Inc. prior to its dissemination. All sources are believed to be reliable but do not constitute specific investment advice. The views expressed are those of the firm as of April 2019 and are subject to change. These opinions are not intended to be a forecast of future events, a guarantee of results, or investment advice. Any advice given is general in nature and investors must consider their own individual circumstances. In all cases, please contact your investment professional before making any investment choices. Geier Asset Management, Inc. is not responsible for any damages or losses arising from any use of this information. Past performance is no guarantee of future results.