7 Quick & Easy Financial Rules of Thumb

When it comes to personal finance, there's a lot to learn. But there are also some shortcuts that can come in handy when you're figuring out stuff like how expensive a house to buy, or how much life insurance to get. (Just remember that these are only guides, and you should take all of your circumstances into account when you make financial decisions.)

Here are six of the most common financial rules of thumb:

Life Insurance Coverage¹

The simplest way to estimate how much life insurance to get is to multiply your annual salary by 7. Since it's so simple, this method doesn't take into account some important factors—like how old your kids are and how much money your family would need to pay off the mortgage or other debts. (For a more accurate estimate, check out our life insurance calculator, or talk with an Allstate financial professional.)

The rule of 72²

The main goal of putting money into a savings account or CD is to earn interest, right? The rule of 72 gives you an easy way to figure out how long it will take to double your money, depending on what your interest rate is. Just divide 72 by the interest rate. So if your savings account earns 3 percent, it will take 24 years to double your money. At 6 percent interest, your money will double in 12 years.

But remember, this doesn't take taxes or fees into account.

Housing Costs³

Personal finance experts say it's a good idea to keep your housing costs less than 28% of your income. If you're renting, that means your rent and utility bills. If you own, it includes your mortgage, property taxes, home insurance, and maintenance.

So if your total, pre-tax household income is $80,000, you shouldn't spend more than $22,400 on housing expenses for the year (about $1,867 a month).

Debt Load⁴

Those same experts say that the total amount of your debts (not including home loans) should be less than 36% of your annual pre-tax income.

Again, let's say you make $80,000. In that case, you should have less than $28,800 in debt. So if you're in the market for a second car, but you already have $3,000 in credit card debt, a $12,000 car loan, and $8,000 in student loans, you should look for a car that will require less than $6,800 in loans.

How Long To Keep Financial Documents⁵

If you've been hanging on to a pile of paperwork for decades, not knowing whether you still need it, this guide is for you.

Emergency Fund⁶

There are actually a couple common suggestions out there when it comes to having an emergency fund. First off, an emergency fund is money you set aside that should only be used in an emergency—say, if the refrigerator breaks, or the basement floods, or the transmission dies. It can provide a cushion that helps you stay out of debt during a tough time.

The two most common suggestions for how much to save are $1,000 or three to six months of living expenses. To learn more about how much is right for you, learn the ins and outs of emergency funds.

Retirement Savings⁷

Chances are, you've already heard the suggestion to save 10% of your pre-tax income for retirement. This isn't actually a rule of thumb; it's more of a generalization. The truth is your actual savings goal should depend on a handful of factors like how much your current living expenses are, how long before you retire, and what kind of investments you use. Try out our Retirement Snapshot^SM to see how different savings amounts could affect your retirement income.

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