When to break personal finance rules
Financial rules of thumb can be useful in taking the guesswork out of money issues. But there are times when the rules may not apply to you. Some examples:
Rule: Don’t spend more than half your budget on living expenses.
One often-quoted formula suggests spending no more than 50 percent of your take-home pay on necessities (including housing, transportation and food), dedicating 20 percent to savings and debt and maxing out at 30 percent for lifestyle expenses (including cable, gym membership and dining out).
When to break it: This formula is a good start, but your budget should allow for breathing room when life calls for adjustments. For example, if you neglected your retirement accounts in your younger years, you’ll need to save more in your 40s and 50s to catch up, says Miguel Gomez, a certified financial planner in El Paso, Texas.
Getting mired in high-interest debt could call for using more than 20 percent of your income to pay it off. Also, a savings goal, such as a home remodel or early retirement, can change the equation. If you live in the Bay Area, New York or another high-cost region, you may easily blow 50 percent of your income on necessities once you take housing into account.
You can experiment with eliminating categories altogether by setting a monthly cap that covers all variable spending. Whatever your spending and saving plan is, make it realistic. If your budget doesn’t leave room for indulgences, it likely won’t stick.
Rule: Pay off highest-interest debt first.
Tackling debt with the highest interest rates (usually credit card balances) means more money goes back in your pocket
When to break it: When the highest interest rate applies to your largest balance, paying it off can be daunting. For those who feel discouraged, “paying the lowest balance first can be highly motivating and keep people focused on becoming debt-free,” says Bruce McClary, vice president of communications for the National Foundation for Credit Counseling.
You also may want to pay down your debt more gradually to pad your emergency fund and contribute enough to your 401(k) to earn the company match.