Put 20% down when buying a home. Don\u2019t spend more than 30% of your income on housing costs. Keep child care expenses below 10% of your annual household income.<\/p>\n\n\n\n
These money rules of thumb can be useful guardrails, helping you allocate spending and determine what\u2019s affordable. They can also be incredibly defeating when they feel unattainable.<\/p>\n\n\n\n
If money \u201crules\u201d feel completely detached from your reality, know this: The average American doesn\u2019t come close to hitting many of the popular money rules. And that\u2019s OK.<\/p>\n\n\n\n
\u201cIf you treat \u2018rules of thumb\u2019 as rigid rules, you\u2019re setting yourself up for frustration,\u201d says William O\u2019Donnell, president of Heartland Financial Solutions in Bellevue, Nebraska. \u201cThe thing people tend to forget is that guidelines are flexible because everybody\u2019s situation is different.\u201d<\/p>\n\n\n\n
What\u2019s important is having a handle on your expenses and building a spending plan that works for you, not some ideal. Here\u2019s how to view money rules of thumb in the context of your own personal financial reality.<\/p>\n\n\n\n
The rule: Budget 50% for needs, 30% for wants, 20% for savings<\/strong><\/p>\n\n\n\n The reality: Housing alone can eat up half of your take-home pay<\/strong><\/p>\n\n\n\n The 50\/30\/20 rule<\/a> is a popular budgeting framework that divvies up after-tax income into three buckets: needs, wants and savings. But must-pay expenses can bust that budget before you even get started.<\/p>\n\n\n\n In 2020, for example, 23% of American renters spent half or more of their income on rent alone, according to the most recent data available from the U.S. Census Bureau. Add in other needs \u2014 utilities, groceries, transportation, insurance, child care and debt payments \u2014 and there\u2019s little, if anything, left over for wants or savings.<\/p>\n\n\n\n Don\u2019t scrap your budget if the buckets don\u2019t work. Instead, embrace the principle and adjust the framework to fit your current financial situation with an eye toward where you\u2019d like to be long-term. Sure, it may be more of an 85\/10\/5 budget now, but over time you can move closer to your ideal balance.<\/p>\n\n\n\n Simply tracking all of your expenses is a good start; you\u2019ll see where every dollar is going and can make more informed decisions about your spending.<\/p>\n\n\n\n The rule: Cap child care spending at 7% of your income<\/strong><\/p>\n\n\n\n The reality: Most families spend 20% or more on child care<\/strong><\/p>\n\n\n\n The U.S. Department of Health and Human Services considers spending more than 7% of your annual household income on child care unaffordable.<\/p>\n\n\n\n But a whopping 51% of parents spend more than 20%, according to a 2022 survey from Care.com, which interviewed more than 3,000 parents paying for child care.<\/p>\n\n\n\n There are few things you can do to dramatically cut child care costs, but discounts and scholarships may be available, depending on your state<\/a> and child care situation.<\/p>\n\n\n\n A dependent care flexible spending account<\/a> is another option. If your employer offers it, you can contribute up to $5,000 pretax and use the funds to help pay for a nanny, day care, after-school care and summer camp registration, among other things.<\/p>\n\n\n\n The rule: You need a 20% down payment to buy a house<\/strong><\/p>\n\n\n\n The reality: First-time home buyers typically put around 7% down<\/strong><\/p>\n\n\n\n The 20% down payment \u201crule\u201d is an outdated one, says Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors.<\/p>\n\n\n\n \u201cThe typical first-time buyer puts down just 6-7% for a down payment,\u201d Lautz says.<\/p>\n\n\n\n Yes, lenders once required such a substantial down payment, but they now rely on private mortgage insurance, or PMI, to mitigate their own risk, passing on the cost to borrowers.<\/p>\n\n\n\n Home buyers who put less than 20% down pay, on average, 0.58% to 1.86% of the original loan amount per year for PMI, according to Genworth Mortgage Insurance, Ginnie Mae and the Urban Institute. That can add hundreds of dollars to your monthly mortgage payment<\/a>.<\/p>\n\n\n\n Putting in more money upfront lowers the monthly and overall cost of your mortgage, but emptying your savings to buy a home can leave you on shaky financial ground.<\/p>\n\n\n\n Roughly 3 in 10 homeowners (29%) no longer felt financially secure after purchasing their current home, according to a 2020 survey conducted by The Harris Poll for NerdWallet. That feeling was most acute among younger homeowners, with 42% of millennial and 54% of Generation Z homeowners feeling financially insecure after purchasing their home, compared with 31% of Generation X and 16% of baby boomer homeowners.<\/p>\n\n\n\n A mortgage broker can run the numbers to help you figure out the sweet spot for your down payment, but you also need to ask yourself a few questions, Lautz says.<\/p>\n\n\n\n \u201cDo you need money in savings to remodel once you are in the home, or backup savings for other expenses?\u201d she says. \u201cWould a lower monthly mortgage payment be easier for other monthly expenses such as student debt or child care?\u201d<\/p>\n\n\n\n This article was written by NerdWallet and was originally published by The Associated Press.<\/em><\/p>\n\n\n\n More From NerdWallet<\/strong><\/p>\n\n\n\n Kelsey Sheehy writes for NerdWallet. Email: ksheehy@nerdwallet.com. Twitter: @KelseyLSheehy.<\/p>\n\n\n\n The article Don\u2019t Let Money Rules of Thumb Get You Down originally appeared on NerdWallet.<\/p>\n","protected":false},"excerpt":{"rendered":"Put 20% down when buying a home. Don\u2019t spend more than 30% of your income on housing costs. Keep child care expenses below 10% of your annual household income. These money rules of thumb can be useful guardrails, helping you allocate spending and determine what\u2019s affordable. They can also be incredibly defeating when they feel […]","protected":false},"author":7,"featured_media":3104,"comment_status":"closed","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_lmt_disableupdate":"no","_lmt_disable":"","attr_excerpt":["Put 20% down when buying a home. Don\u2019t spend more than 30% of your income on housing costs. Keep child care expenses below 10% of your annual household income."],"footnotes":""},"categories":[3],"tags":[7,21,35,43,22,29,20],"class_list":["post-3012","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-personal-finance","tag-bank","tag-checking","tag-digital-banking","tag-financial-wellness","tag-money-market","tag-personal","tag-savings"],"yoast_head":"\n