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Money 'rules of thumb' can be useful guardrails, but they can also be incredibly defeating when they feel unattainable. Image Credit: Pexels

Put 20 per cent down when buying a home. Don't spend more than 30 per cent of your income on housing costs. Keep child care expenses below 10 per cent 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 person 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," said William O'Donnell, president of US-based Heartland Financial Solutions. "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.

If you treat 'rules of thumb' as rigid rules, you're setting yourself up for frustration

- William O'Donnell

THE RULE: Divide your budget into needs (50 per cent), wants (30 per cent) and savings (20 per cent).

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 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 per cent of renters spent half or more of their income on rent alone, according to the most recent data available. 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 your money is going and can make more informed decisions about your spending.

Stock Dirhams
Divide your budget into needs (50 per cent), wants (30 per cent) and savings (20 per cent)? The reality is housing alone can easily eat up half of your take-home pay.

THE RULE: Don't spend more than 7 per cent of your household income on child care.

THE REALITY: Most families spend 20 per cent or more on child care.

Many regulators worldwide considers spending more than 7 per cent of your annual household income on child care unaffordable.

But a whopping 51 per cent of parents spend more than 20 per cent, according to a 2022 survey from service US information platform, 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. You can contribute up to $5,000 (Dh18,365) and use the funds to help pay for a nanny, daycare, after-school care, and summer camp registration, among other things.

THE RULE: You need a 20 per cent down payment to buy a house.

THE REALITY: First-time homebuyers typically put around 7 per cent down.

The 20 per cent down payment 'rule' is an outdated one, said Jessica Lautz, vice president of demographics and behavioral insights at a US-based realtors association.

Yes, lenders once required such a substantial down payment, but they now rely on private mortgage insurance (PMI) to mitigate their own risk, passing on the cost to borrowers.

Homebuyers who put less than 20 per cent down pay, on average, 0.58 per cent to 1.86 per cent of the original loan amount per year for PMI, according to global insurers. That can add hundreds to your monthly mortgage payment.

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Do you need a 20 per cent down payment to buy a house? The reality is first-time homebuyers typically put around 7 per cent down.

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 per cent) no longer felt financially secure after purchasing their current home, according to a 2020 survey conducted by NerdWallet. That feeling was most acute among younger homeowners, with 42 per cent of millennial and 54 per cent of Generation Z homeowners feeling financially insecure after purchasing their home, compared with 31 per cent of Generation X and 16 per cent 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 added.

"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"