Make a 20% down payment when you buy a house. Do not spend more than 30% of your income on housing expenses. Keep child care expenses below 10% of your annual household income.
These rules of thumb about money can be useful guardrails, helping you allocate spending and determine what’s affordable. They can also be incredibly defeating when they feel unattainable.
If the “rules” of money feel completely detached from your reality, know this: the average American doesn’t come close to many of the popular rules of money. And that’s fine.
“If you treat ‘rules of thumb’ as hard and fast rules, you set yourself up for frustration,” says William O’Donnell, president of Heartland Financial Solutions in Bellevue, Nebraska. “What people tend to forget is that the guidelines are flexible because everyone’s situation is different.”
The important thing is to control your spending and create a spending plan that works for you, not an ideal one. Here’s how to view the general rules of money in the context of your own personal financial reality.
The rule: Budget 50% for needs, 30% for wants, 20% for savings
The reality: housing alone can consume half of your take-home pay
The 50/30/20 rule is a popular budgeting framework that divides after-tax income into three categories: needs, wants, and savings. But the expenses you have to pay can blow up that budget before you even get started.
In 2020, for example, 23% of US renters spent half or more of their income on rent alone, according to the most recent data available from the US Census Bureau. Add other necessities (utilities, groceries , transportation, insurance, childcare, and debt payments) and there is little, if any, left for necessities or savings.
Read: Another sign of an impending recession? Americans’ ability to pay bills on time fell for the first time in 5 years
Don’t throw away your budget if the cubes don’t work. Instead, embrace the principle and adjust the framework to fit your current financial situation with an eye toward where you’d like to be in the long term. Sure, it may be more of an 85/10/5 budget now, but over time you can get closer to your ideal balance.
Simply tracking all your expenses is a good start; You’ll see where every dollar is going and be able to make more informed decisions about your spending.
The rule: limit child care expenses to 7% of your income
The reality: Most families spend 20% or more on child care
The US Department of Health and Human Services considers it unaffordable to spend more than 7% of your annual household income on child care.
But a staggering 51% of parents spend more than 20%, according to a 2022 Care.com survey, which surveyed more than 3,000 parents who pay for child care.
There are some things you can do to slash child care costs, but discounts and scholarships may be available, depending on your state and child care situation.
A dependent care flexible spending account is another option. If your employer offers it, you can contribute up to $5,000 before taxes and use the funds to help pay for a babysitter, day care, after-school care, and summer camp enrollment, among other things.
Read: Childcare costs skyrocket as parents prepare to return to the office
The rule: You need a 20% down payment to buy a house
The reality: First-time homebuyers typically put down around 7% down
The 20% down payment “rule” is outdated, says Jessica Lautz, vice president of demographic and behavioral data for the National Association of Realtors.
“The typical first-time buyer puts down only 6-7% down,” says Lautz.
Yes, lenders once required such a substantial down payment, but now they rely on private mortgage insurance, or PMI, to mitigate their own risk, passing the cost onto borrowers.
Homebuyers who pay less than 20% pay, on average, between 0.58% and 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.
Investing more money up front lowers your monthly and overall mortgage cost, but emptying your savings to buy a home can leave you on shaky financial ground.
About 3 in 10 homeowners (29%) no longer felt financially secure after purchasing their current home, according to a 2020 survey by The Harris Poll for NerdWallet. That sentiment was most acute among younger homeowners, with 42% of millennials and 54% of Gen Z homeowners feeling financially insecure after purchasing their home, compared to 31% of Gen Z homeowners. Generation X and 16% of baby boomers.
Watch: Home hunters say they are ready to buy in the next six months, even in a recession. This is why.
A mortgage broker can run the numbers to help you determine the sweet spot for your down payment, but you should also ask yourself some questions, Lautz says.
“Do you need money in savings to remodel once you’re in the house, or backup savings for other expenses?” she says. “Would it be easier to pay a lower monthly mortgage for other monthly expenses, like student debt or child care?”
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Kelsey Sheehy writes for NerdWallet. Email: firstname.lastname@example.org. Twitter: @KelseyLSheehy.