rules of th(d)umb

Rules of Th(d)umb

Ok so we’ve added quite a bit of detail to our expenses, but let’s compare them to a few key benchmarks – what should our savings rate be and how much should we spend on a home and car?

The humongous fly in our pie chart is spending on Travel – $21,500 a year and 35% of our total spending! This probably comes off as completely absurd, but I think that’s only because you never hear any “expert” advice on how much to spend on travel – there is no rule of thumb on fun.

This is a good thing because rules of thumb are stupid – it’s basically a way of saying “I’m too lazy to actually think about this”. If you ask a person how much you should save for retirement the likely answer will be 10%. People just accept that 10% is the amount you’re supposed to save because that’s what most articles, talking heads, and co-workers regurgitating the first two sources say you should do. No one really thinks about it.

The number 10% isn’t a wrong answer; it’s just not right for everyone. 10% works great for people who plan on working a 40+ year career, retiring when they qualify for full social security (age 67), and spending the same as they did in their working years. The “experts” have taken the correct answer for this specific group of people and are passing it off as a rule of thumb for everyone.

It’s so bad that we’re now reversing the logic; people assume saving 10% is some kind of maxim and extrapolate out that you can’t retire until age 67. Or the more direct path is to say “well the government says retirement age is 67 so that’s when I can retire”. Um no. You can retire whenever you don’t need an income anymore. How much you should save in order to not need an income (at an age of your choosing) is a bit more complicated than plugging 10% in and hoping for the best.

The 10% rule has become the proverbial tail wagging the dog – people blindly save 10% (usually not even that much) then adjust their lifestyles and retirement date around what that savings allows them. We should be doing the opposite. We should consider the life we want and plan our savings around that. It’s your life, freaking take some time and think about it.

This is the philosophy my wife and I are trying to follow, though we don’t have it completely down yet. We definitely find ourselves making automatic/rule of thumb type purchasing and lifestyle decisions that maybe don’t align with our goals. It’s a process, not a snap your fingers solution. At any rate, I’m content with our progress, and out of curiosity let’s see how we stack up against some common rules of thumb:

You should save 10% of your gross income for retirement.

We’re doing 46%. Before you start, yes, this is absolutely helped by our high incomes. But so what, we’ve worked, sacrificed, and been lucky to gain those fat checks and instead of inflating our lifestyles along with our income we’ve tempered our spending and saved the majority of our raises. I firmly believe inflating your lifestyle does not lead to greater happiness, a thought well expressed in an early Mr. Money Mustache post on Hedonic Adaptation.

Since I brought up MMM I feel compelled to share one of my favorite posts of his: The Shockingly Simple Math Behind Early Retirement where he calculates years until retirement based on savings rate. With our 46% savings rate we’d be 19 years away from retirement if we started at zero savings.

You should spend 30% of your income on a mortgage.

Our required mortgage payments were exactly 6% of our gross income in 2016. It’ll be 0% going forward because we paid off our house earlier this year! Most people house hunt by first getting approved for a loan, then shopping for homes that cost the maximum their loans will allow. Again, this is sooo backwards. You should think about your specific situation and own your home-buying decision.

According to some quick calculators on, we can “afford” a $4,500 mortgage, which is a $950,000 home! So my wife and I can buy a $1M home and the rule of thumb would say that’s fine. Nah, think we’ll keep travelling instead.

You should spend 20% of your income on car payments.

We spend 0%. Actually our total spending on vehicles (gas, insurance, yada) is only 1.35%. According to trusty we can “afford” $3,200 in monthly car payments – hellooooo matching Teslas! I think many people car shop the same way they house hunt – seeing how much loan you’re approved for and then buying something that costs that much.

Wrapping Up

People assume when a guy in a suit spits a number out at you it’s what you’re supposed to spend. STOP DOING THAT! Take the time and figure out what’s right for you. The motive of financiers is to give you the biggest loan they think you’ll be able to pay back – they are not determining what an appropriate amount is given your specific circumstances.

In conclusion, if you plan on working until you’re 67 (being careful to never earn less than you do now), want to keep your exact same lifestyle in retirement, and don’t want to spend money on travel, then the rules of th(d)umb probably apply to you.

Otherwise, buy a small house and drive small used cars.


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