7 Time-Tested Money Rules One Should Follow And When To Bend Them

The ‘one size fits all’ formula does not apply to personal finance. Here are some money rules—and when you should realign them for better financial outcomes

The goal is to maintain a balance that allows you to cover essentials, build financial security, and enjoy some flexibility

Source : ABPLIVE AI

Managing money can feel overwhelming at times, but having a few solid rules to guide you can make a tremendous difference. The trick, however, is not following them blindly, but knowing when to stick to them, and when to adjust them based on your situation. After all, the ‘one size fits all’ formula does not apply to personal finance. Here are some money rules—and when you should realign them for better financial outcomes.

The 50/30/20 Rule

Allocate 50 per cent of your income to necessities, 30 per cent to wants, and 20 per cent to savings or debt repayment. This split works well if your income is stable and your month-to-month expenses are fairly predictable. But, if your earnings fluctuate or unexpected costs arise—like medical bills—you may need to adjust these percentages. The goal is to maintain a balance that allows you to cover essentials, build financial security, and enjoy some flexibility. 

Save 6-9 Months’ Expenses in an Emergency Fund

Set aside 6-9 months’ worth of essential expenses in an easily accessible account, like a savings account. The right amount depends on how steady your income and expenses are. If you're a freelancer with inconsistent income, you might want to save more–9 to 12 months–to cover low-income months. The same applies if you work in a specialized field where finding a new job could take time. Think of your emergency fund as a rainy day reserve that keeps you afloat during uncertain times like a job loss or unexpected expenses. 

The 20/4/10 Rule for Car Loans

The 20/4/10 rule is a simple guideline designed to help keep car financing costs low. Make a 20 per cent down payment, keep the loan term within four years, and ensure your total car expenses–EMI, insurance, maintenance–are under 10 per cent of your monthly income. Some situations may demand more flexibility—like a long commute or the need for a work vehicle. Adjust the rule based on your needs. The focus is making sure your car choice doesn’t derail your bigger financial goals. 

The 40 Per Cent Home Loan Rule 

Try to restrict your home loan EMI below 35-40% of your monthly income. If home loan payments take up more than half of your income, you may find yourself struggling to manage daily expenses, and saving for retirement, or emergencies. The same rule may also work well for all your loans combined–car EMIs, student loans, credit cards, personal loans, and any other. The aim is to ensure your debt payments leave enough for you to live comfortably today while still setting aside money for tomorrow.

The 10x Rule For Life Insurance

Aim for life insurance coverage around 10 times your annual income to protect your family if something happens to you. This is especially crucial if your income pays the bills, mortgage, or funds your family’s plans. Even without dependents, having some coverage will prevent your debts from straining your family finances. It’s key to align your financial responsibilities with your coverage, rather than sticking to a fixed number. 

Save 15 Per Cent For Retirement

Try setting aside at least 15 per cent of your pre-tax income towards your retirement fund in a fund of your choosing. This works best if you start early, but if you’ve made a late start, consider increasing that to 20-25 per cent to make up for lost time. If you have an assured pension or other guaranteed income, you may not need to save as aggressively. Starting early is the key here but if that’s not possible, adjust your contribution based on your income and financial situation. 

The 4 Per Cent Withdrawal Rule

To make your retirement savings last, limit withdrawals to 4 per cent in the first year, then adjust for inflation over time. If you retire early or face market volatility, consider reducing withdrawals to stretch your savings. This may help ensure your money lasts at least 30 years in retirement.

Personal finance involves many parts—earning, saving, investing, and planning for the future. These rules form a solid framework and are a good starting point for your financial journey. 

(The author is the Senior Manager-Communications at BankBazaar.com. This article has been published as part of a special arrangement with BankBazaar)