Millennial Money: Don’t let money ‘rules’ get you down

If money “rules” feel completely detached from your reality, know this: The average American doesn’t come close to hitting many of the popular money rules. And that’s OK.

NerdWallet

Aug 30, 2022, 1:49 PM

Updated 684 days ago

Share:

Millennial Money: Don’t let money ‘rules’ get you down
Put 20% down when buying a home. Don’t spend more than 30% of your income on housing costs. Keep child care expenses below 10% of your annual household income.
These money rules of thumb can be useful guardrails, helping you allocate spending and determine what’s affordable. They can also be incredibly defeating when they feel unattainable.
If money “rules” feel completely detached from your reality, know this: The average American doesn’t come close to hitting many of the popular money rules. And that’s OK.
“If you treat ‘rules of thumb’ as rigid rules, you’re setting yourself up for frustration,” says William O’Donnell, president of Heartland Financial Solutions in Bellevue, Nebraska. “The thing people tend to forget is that guidelines are flexible because everybody’s situation is different.”
What’s important is having a handle on your expenses and building a spending plan that works for you, not some ideal. Here’s how to view money rules of thumb in the context of your own personal financial reality.
THE RULE: Divide your budget into needs (50%), wants (30%) and savings (20%).
THE REALITY: Housing alone can easily eat up half of your take-home pay.
The 50/30/20 rule is a popular budgeting framework that divvies up after-tax income into three buckets: needs, wants and savings. But must-pay expenses can bust that budget before you even get started.
In 2020, for example, 23% of American renters spent half or more of their income on rent alone, according to the most recent data available from the U.S. Census Bureau. Add in other needs - utilities, groceries, transportation, insurance, child care and debt payments - and there’s little, if anything, left over for wants or savings.
Don’t scrap your budget if the buckets don’t work. Instead, embrace the principle and adjust the framework to fit your current financial situation with an eye toward where you’d like to be long-term. Sure, it may be more of an 85/10/5 budget now, but over time you can move closer to your ideal balance.
Simply tracking all of your expenses is a good start; you’ll see where every dollar is going and can make more informed decisions about your spending.
THE RULE: Don’t spend more than 7% of your household income on child care.
THE REALITY: Most families spend 20% or more on child care.
The U.S. Department of Health and Human Services considers spending more than 7% of your annual household income on child care unaffordable.
But a whopping 51% of parents spend more than 20%, according to a 2022 survey from Care.com, which interviewed more than 3,000 parents paying for child care.
There are few things you can do to dramatically cut child care costs, but discounts and scholarships may be available, depending on your state and child care situation.
A dependent care flexible spending account is another option. If your employer offers it, you can contribute up to $5,000 pretax and use the funds to help pay for a nanny, day care, after-school care and summer camp registration, among other things.
THE RULE: You need a 20% down payment to buy a house.
THE REALITY: First-time homebuyers typically put around 7% down, according to data from the National Association of Realtors.
The 20% down payment “rule” is an outdated one, says Jessica Lautz, vice president of demographics and behavioral insights at the National Association of Realtors.
Yes, lenders once required such a substantial down payment, but they now rely on private mortgage insurance, or PMI, to mitigate their own risk, passing on the cost to borrowers.
Homebuyers who put less than 20% down pay, on average, 0.58% to 1.86% of the original loan amount per year for PMI, according to Genworth Mortgage Insurance, Ginnie Mae and the Urban Institute. That can add hundreds of dollars to your monthly mortgage payment.
Putting in more money upfront lowers the monthly and overall cost of your mortgage, but emptying your savings to buy a home can leave you on shaky financial ground.
Roughly 3 in 10 homeowners (29%) no longer felt financially secure after purchasing their current home, according to a 2020 survey conducted by The Harris Poll for NerdWallet. That feeling was most acute among younger homeowners, with 42% of millennial and 54% of Generation Z homeowners feeling financially insecure after purchasing their home, compared with 31% of Generation X and 16% of baby boomer homeowners.
A mortgage broker can run the numbers to help you figure out the sweet spot for your down payment, but you also need to ask yourself a few questions, Lautz says.
“Do you need money in savings to remodel once you are in the home, or backup savings for other expenses?” she says. “Would a lower monthly mortgage payment be easier for other monthly expenses such as student debt or child care?”


More from News 12
1:54
Mayor Eric Adams to hold briefing amid extreme heat in Brooklyn

Mayor Eric Adams to hold briefing amid extreme heat in Brooklyn

1:48
HEAT ALERT: Steamy and humid conditions for Brooklyn; possibly pop-up storm later

HEAT ALERT: Steamy and humid conditions for Brooklyn; possibly pop-up storm later

3:30
Trump heads to convention as authorities investigate motive, security in assassination attempt

Trump heads to convention as authorities investigate motive, security in assassination attempt

5:30
In prime-time address, Biden warns of election-year rhetoric, saying ‘it’s time to cool it down’

In prime-time address, Biden warns of election-year rhetoric, saying ‘it’s time to cool it down’

1:54
Reps. Lawler, Torres to introduce bill enhancing Secret Service protection for presidential candidates

Reps. Lawler, Torres to introduce bill enhancing Secret Service protection for presidential candidates

2:07
A look back at US political violence that changed history

A look back at US political violence that changed history

4:10
EXCLUSIVE INTERVIEW: Trump rally attendee gives his eyewitness account of the shooting

EXCLUSIVE INTERVIEW: Trump rally attendee gives his eyewitness account of the shooting

2:37
Security increased at Trump Tower following rally shooting

Security increased at Trump Tower following rally shooting

2:27
Political analyst weighs in on gun violence in wake of Trump rally shooting

Political analyst weighs in on gun violence in wake of Trump rally shooting

1:29
Expert: Security will be a high level concern at presidential events in wake of Trump rally shooting

Expert: Security will be a high level concern at presidential events in wake of Trump rally shooting

1:52
Giglio Feast gets underway in Williamsburg

Giglio Feast gets underway in Williamsburg

1:34
Political analyst: Shooting at Trump rally will bring changes to 2024 Presidential Election

Political analyst: Shooting at Trump rally will bring changes to 2024 Presidential Election

0:28
NYPD: Suspect wanted for fatally shooting man in Bed-Stuy

NYPD: Suspect wanted for fatally shooting man in Bed-Stuy

1:22
2 cases of measles confirmed at Williamsburg Shelter

2 cases of measles confirmed at Williamsburg Shelter

1:48
Sunday service to resume at Brooklyn libraries

Sunday service to resume at Brooklyn libraries

2:03
Poll: More than 40% of women skip or delay medical screenings and appointments

Poll: More than 40% of women skip or delay medical screenings and appointments

2:11
Event calls for end for gun violence on anniversary of 2-year-old’s death

Event calls for end for gun violence on anniversary of 2-year-old’s death

0:38
Laura Kavanaugh to step down as FDNY commissioner

Laura Kavanaugh to step down as FDNY commissioner

1:25
37th annual Bedford Stuyvesant Volunteer Ambulance Corps block party renames street in honor of department founder

37th annual Bedford Stuyvesant Volunteer Ambulance Corps block party renames street in honor of department founder

0:25
NYPD: Woman struck by taxi in Park Slope; hospitalized in critical condition

NYPD: Woman struck by taxi in Park Slope; hospitalized in critical condition