Money rules and guidelines like “save a 6-month emergency fund” are useful when making a budget and determining if you’re on the right track financially. However, some conventional personal finance wisdom might be a bit outdated. Many money rules haven’t been updated in a while and may not reflect the post-pandemic economy. High inflation, interest rates, and housing prices may make certain personal finance guidelines harder to follow. Here are three personal finance rules that may not match today’s financial realities.
Buying a Used Car Is Better Than New
Many personal finance experts say buying a new car is one of the biggest financial mistakes you can make. However, the cost of used cars has increased a lot in the past few years, which has made me consider buying a new vehicle.
The average monthly payment for a used car is now $515 per month—a 27.4% increase from 2019. New car payments have increased by 18.5% to $667 per month. So on average, you’ll only save about $150 per month by choosing a used car versus a new car if you’re financing it.
Personally, I don’t think the savings is significant enough to justify getting a used car. New cars come with warranties and usually need far fewer repairs in the first few years of ownership than used vehicles. Plus, you can often get a better interest rate when financing a new car.
My spouse drives a lot for work, so we need a very reliable vehicle. We’ve had a lot of issues with our used Ford Fiesta that we bought two years ago, which has caused us to reevaluate our stance on vehicles. We thought we would always buy used to save money and avoid depreciation, but we’re now leaning toward purchasing a new vehicle whenever our Fiesta dies.
Housing Should Equal a Third of Your Income Or Less
Another personal finance rule that I think is somewhat out-of-date is that housing should equal 30% of your gross income or less. Unfortunately, the cost of housing has increased a lot in the past few years, making this rule less realistic for many Americans.
From March 2021 to March 2022, housing prices increased by about 20% and rent jumped 12%. Although home prices are starting to come down, interest rates have increased substantially, so housing costs are still higher than they were pre-pandemic.
It’s certainly better to keep your housing costs low by finding roommates, house hacking, or living in a smaller space. However, if you live in an expensive city, it may not be possible to find a housing situation that follows the 30% rule. Given the changes in the housing market, personal finance experts say you may be able to push your total housing costs (including things like utilities) up to 40% of your monthly income if you need to.
My problem with the 30% rule is that it doesn’t account for differences in earnings. If you take home $100,000 or more per year, you can probably afford to spend 40% of your income on housing while having plenty of money left over for savings and other expenses.
So I think the best way to figure out how much house you can afford is by taking a more holistic view of your finances. Analyze your monthly expenses, income, and financial goals to figure out how much you can comfortably afford to spend on a mortgage or rent.
Save 15% of Your Income For Retirement
Economists predict that stock market returns will be lower than usual for the next decade (and potentially beyond that). Plus, the future of Social Security remains unclear, which could lower millennials’ overall retirement income.
As a result, it’s a good idea for millennials to save more for retirement than the standard 15%, especially if we want to leave the workforce at 65. Some financial experts believe we should be socking away as much as 40% for retirement.
However, that’s an unrealistic goal for many of us, myself included. So I’m just trying to slowly increase my retirement contributions by 1% to 2% each year. Whenever I get a bump in income, I try not to inflate my lifestyle and divert that money to my retirement account instead.
If you’re closer to retirement and started saving late, you may also need to bump up your savings rate. Luckily if you’re 50 or over, you can make catch-up contributions to your 401k or IRA to build your nest egg faster.
What do you think of these personal finance rules? Do you follow them? Are there any other money guidelines you think are outdated? Share your thoughts in the comments section below!
Vicky Monroe is a freelance personal finance and lifestyle writer. When she’s not busy writing about her favorite money saving hacks or tinkering with her budget spreadsheets, she likes to travel, garden, and cook healthy vegetarian meals.