How to Connect Financial 'Rules of Thumb' to Today's Economic Reality

A hand holds a big, round magnifying glass over a paper with the words "reality check" printed in marker.
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Disconnected. That's some feedback I recently received regarding some of the core nuggets of personal finance wisdom that I've been dispensing for decades. Hmmm. Honestly, and this may be a blind spot, I've always thought of them as "evergreen" -- you know, always on point and applicable. The comment encompassed the difficult financial landscape that many Americans face today. In a Bankrate poll in January, 69% of Americans reported their cost of living had gotten worse since 2020, and 59% indicated that despite the country not being in a recession, from a personal perspective, they felt like it was.

With that context, I understand how you could hear some of these so-called "pearls of personal finance wisdom" and think to yourself, "That just doesn't work for me." Well, let's not go there so fast. Maybe you have a little wiggle room. Instead, read on as I take a fresh -- for me -- look at five common financial tips that might have you throwing up your arms in resignation.

The Rule: Save 10% of Your Income for Retirement

Unlike other points here, there is a use-it-or-lose-it element to this tip. It isn't so much about your opportunity to contribute to the Thrift Savings Plan or a 401(k) or even your vision of what retirement looks like, but rather the importance of time and compounding returns. The difference between beginning to invest at 22 or 32, let alone 42, is stark. Time is a game changer. Just Google "the power of compounding," and you will get a sense of why.

Connected approach: Do what you can. It may not be 10% right now, but even 1% or 2% will keep you in the game, put time on your side and make it easier to grow your savings when your situation turns -- and it will.

The Rule: Maintain an Emergency Fund Equivalent to 3-6 Months of Your Fixed Expenses

This is foundational. Having the financial capacity to respond to a financial emergency or opportunity without incurring high-interest debt or having to borrow or cash in longer-term investments is important. In fact, when I have the opportunity to talk with service members about their transition out of the military, I even encourage them to aim higher. Your target for the ideal emergency fund may vary from conventional wisdom, but there is a place for an emergency fund in your financial framework.

Connected approach: Maybe you set a more manageable and achievable goal to get this piece of your finances headed in the right direction. A $1,000 emergency fund is often used as a good place to start. It's a figure that checks the "can I do that?" box and is enough to address many of the emergencies that pop up frequently.

The Rule: Don't Use Credit Cards Unless You Can Pay Off the Balance Each Month

Here, again, is another seemingly reasonable bit of wisdom, a concept that makes even more sense when the average interest rate on credit cards is about 25%. I've always harped on the importance of using credit cards for convenience rather than as a way to spend beyond your means.

Connected approach: Tread carefully here. Earlier, I mentioned the power of compounding. That's a force that can work against you if you're carrying a credit-card balance from month to month. However, if you occasionally have to carry that balance to make it through the month, just don't let it become commonplace, and work hard to knock it out. That way, maybe you don't get to a clean slate each month, but you also don't create an avalanche of debt.

The Rule: Your Mortgage Payment Should Be Less Than 28% of Your Gross Income

In this scenario, your payment includes principal, interest, taxes and insurance. And with mortgage rates like we haven't seen in 30 years and sticky-high, real-estate prices, this rule just might, for the moment, be, well, disconnected.

Connected approach: This could be an area where you have to reach and breach, assuming a lender will work with you. I'm not promoting buying a house you can't afford, as that could just lead to disaster. However, if you have examined your expenses and know you can make it work, it might be worth a stretch. Interest rates will likely provide you an opportunity to refinance in the future. If I was a military family, I would just hold off until interest rates or the real-estate market moderates. My primary rationale is avoiding a situation in which, unlike many of your civilian counterparts, you can't just outlast the challenges of the day.

The Rule: Maintain 10 Times Your Annual Income in Life Insurance

When you evaluate risk, the impact of the potential loss is front and center. If something happens to a family's sole breadwinner, the loss could indeed be catastrophic. In my mind, that makes life insurance non-negotiable.

However, perhaps 10 times your annual income is not the "right" amount. Some time spent with a life insurance calculator, such as the one on the VA website, may give you a more accurate number. This may be a rule you "bend" through your selection of an "appropriate" life insurance policy. Perhaps you choose a 10-year term policy instead of a 20-year term or use a term policy instead of a permanent policy for what might be better protected by a more expensive permanent policy. My point: Don't overlook this protection, as it can likely be less expensive than you might think.

Connected approach: Get the coverage you need, with an eye on doing it in an affordable package.

So the next time you hear one of these, or other, rules of thumb, don't just throw up your arms in disgust. Instead, even if you're not fully onboard, see whether you can use that nugget to shape the decisions you make and the direction you take.

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