Do These Personal Finance "Rules" Still Hold Up?

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Generic personal finance advice has always garnered some derision, but lately, there’s been more of a backlash. The loudest voices have belonged to millennials, many of whom have struggled with their finances and now bristle when told how much money they "should" have in the bank.

It’s crucial to remember that this is personal finance. As always, the key word is "personal." A rule of thumb exists because people love a good benchmark to compare ourselves to, but falling short of the benchmark isn’t an indictment against your character. These rules of thumb can’t account for every unique situation you’ve faced; it’s simply a recommendation to the masses, without any nuance.

With that said, let's look at some of the most popular rules of thumb in personal finance, and consider whether they should still be used as guideposts in your financial plan.

Have 2x Your Salary Saved by 35

It’s the rule of thumb heard around the world, or at least mercilessly mocked on Twitter by users who aren't on pace to save anywhere near that much. This particular rule has been recently attributed to Fidelity Investments, though Fidelity is far from the first to advise such a seemingly high savings goal. In fact, traditional wisdom taught to Certified Financial Planners in the Fundamentals of Financial Planning textbook maintains a 35-year-old should have saved 1.6 to 1.8 times his or her salary.

Which means if you, at 35, are earning $60,000, then you should have $96,000 to $120,000 saved, depending on your metric of choice.

Given that 60 percent of millennials don't have any money saved at all, even the CFP textbook’s benchmark probably seems unrealistic to many people in their late 20s and early 30s.

Plenty of Millennials, Gen Xers, and even Baby Boomers scoff at the idea of having two times their salary saved by 35. Wage stagnation, student loan debt, and the gender wage gap are all commonly cited factors as to why this rule of thumb is no longer attainable for your average person. While it may feel laughably high, it’s still a decent benchmark if you have any desire to retire in your late sixties or early seventies. We’re living longer, the future of Social Security continues to be uncertain, and you never know if your health will allow you to continue working into your twilight years.

You could, however, set your sights on having a minimum of one times your salary saved by 35, especially for the traditionally employed with access to an employer-matched retirement plan. For example, let's say you started working a job at 23 with a 3 percent 401(k) match and a $30,000 starting salary. That means by putting 3 percent away, you’re saving $900 a year and getting an instant match of $900. That’s $1,800 a year saved. Factor in compound interest with an average return of 6 percent over the next five years and by 28 you’ll have about $10,145.

Here's how things might shake out over the next few years:

  • By 28, you’ve paid down some of your debt and are able to contribute 6 percent to retirement and still get that 3 percent match. Plus, you’re now earning $42,000. That means $3,780 is going into your retirement account each year.
  • By 31, you have about $24,120 saved. You’re now earning $55,000 and can save 10 percent for retirement plus your 3 percent match. That’s $7,150 a year.
  • By 33, you’ve saved about $41,810 and you’re making $60,000. You continue to put away 10 percent and get the 3 percent match, so you have $7800 a year to put into retirement.
  • By 35, and assuming the continued 6 percent interest rate, you’ll have just over $63,000 saved for retirement.

That's still well below the recommended benchmarks from both Fidelity and the CFP, but it's at least a start. And you could be even closer to the finish line by this point if you'd put the next rule of thumb in place from the beginning.

Save at Least 10 Percent of Your Salary

Saving more than 10 percent of your total take-home salary is definitely a stretch for many twenty-somethings. We sure weren’t in a position to put away 10 percent of my salary toward retirement in my early twenties, nor were most of my peers.

Start small and build over time. Ideally, you should put enough aside to at least get any employer match on your 401(k), and then work up to larger contributions as your paychecks get bigger, but if that feels unattainable, then begin by putting aside 0.5 percent of your salary towards retirement. It may seem like a pointless amount, but forming the habit is critical, whether you're traditionally employed or self-employed.

Then, creep up that contribution by 0.5 percent every three to six months. You’ll probably barely notice a difference in your paycheck, and you’ll slowly push towards the ideal 10%.

Have an Adequate Emergency Fund

Emergencies will arise, so it’s important to be prepared. It’s perhaps even more critical for contractors, freelancers, or anyone else working with variable income. Three months' worth of expenses is a good start; six is ideal.

When evaluating what constitutes three months of living expenses, note that it should be based on your bare-bones budget. Consider the amount you need to keep paying your rent or mortgage, have food on the table, pay the utilities and cell phone bill, cover transportation, and any other necessities such as student loans. Take all that, multiply it by three, and then make sure you've got at least that much saved in liquid assets should job loss or another financial emergency arise. 

The problem is that many young people already have their hands full paying down student loan debt, and trying to squirrel away three to six months of living expenses while paying off debt feels both impossible and impractical. You want your debt gone yesterday, so why would you put so much money toward building a savings buffer (for what might happen) instead of slaying debt that's actively costing you interest?

To account for this, take the advice of personal finance guru Dave Ramsey, and focus first on saving at least $1,000 for emergencies. $1,000 can often get you through smaller emergencies and it prevents you from financing them on a credit card or turning to predatory lending. That minimum emergency fund should be bumped up to $1,500 or even $2,000 if you have any dependents. Then, as you get a little more breathing room in your budget, add a little to your fund at a time until you get to that three-month mark.