Financial Rules of Thumb: what role does traditional advice play in 2022?

15 June 2022

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Many of us grew up with a set of traditional financial rules of thumb. But how much do we really know about those rules, and what role do they play today?

We commissioned YouGov to survey 2,003 people in April 2022 about six financial rules of thumb that we’d identified. We wanted to uncover where people heard about these guidelines for spending and saving, and whether people were still using them in 2022.

Please note that we are not providing advice in relation to these rules of thumb. However, we were able to set some of the financial rules of thumb into context with recent UK statistics on income and spending, raising questions about the role of these rules of thumb in a new generation.

50:30:20 rule

This rule encourages 50% of your net income to be spent on needs (essentials, e.g. rent), 30% on wants (personal items or entertainment), and the remaining 20% on goals (usually savings). The simplicity of this financial rule of thumb offers a more holistic approach to money management. Instead of busy spreadsheets, we’re invited to think about how we prioritise and fund both today and tomorrow.

7% of those we surveyed are aware of and follow the 50:30:20 rule.

Don’t rent, you’re just paying someone else’s mortgage

More than twice as many households were living in rented accommodation in 2021 (4.43 million) compared to 2000 (2 million) in England alone.

Even if buying a home is a key financial goal, government housing affordability statistics show that renting – or ‘paying someone else’s mortgage' – is an inevitability for a growing number of households today. House prices grew faster than earnings in 91% of local authority districts in 2021, and full-time employees in England can typically expect to spend around 9.1 times their workplace-based annual earnings on purchasing a home. This was a statistically significant increase on the previous year’s rate of 7.9 times.

48% of the adults we surveyed recognise this rule, with 57% of those aged 25-34 and 47% of 35-44 year olds recognising it. Even though it was the best-known of the financial rules of thumb we asked about, only 20% of our respondents say they adhere to it.

Save 20% of your income for long-term goals

For those who are able, putting money away for long-term goals sounds like a sensible plan. After all, there’s a question at the heart of many of the financial decisions we make: how do I balance today’s spend with saving and/or investing for tomorrow?

11% of our survey respondents told us they follow this rule of thumb.

Have an emergency fund equal to 6 months’ expenses

In last year’s ‘Worth 2021’ research, we discovered that 65% of UK adults think that keeping a certain amount in savings for an emergency fund (known as ‘precautionary savings’) is the most beneficial financial behaviour.

According to the Office of National Statistics, people tend to save more during times of uncertainty, such as economic recessions and pandemics. In fact, COVID-19 led to an unprecedented rise in precautionary savings, with households saving 26% of their disposable income in the second quarter of 2020.

One in three of those we surveyed recognise this rule of thumb, but only 19% follow it.

Never spend more than 30% of your income on rent

If you’re on median pre-tax pay, and want to rent a one-bedroom home anywhere in London, sticking to this financial rule of thumb could be very hard, if not impossible. For reference, the latest Office for National Statistics data (March 2022) shows average weekly earnings in the UK to be £615, or £31,980 per year.

Even in the cheapest London boroughs, you’ll need to spend around 34% of your income on rent. Those living in other parts of the country might have more luck, with an estimated 25.5% of your median pre-tax pay going on rent for a one bedroom house or flat in England.

Only 7% of our respondents follow this financial rule of thumb.

Put down 20% to buy a house

The Government’s own financial advice service recommends following this financial rule of thumb, adding that mortgage rates become more attractive when you put down a deposit of 20%. However, most estimates, including those of UK Finance, say that the average house-buying deposit in the UK is 15%. Based on statistics from a survey conducted by Hamptons International in 2019, it could take Londoners 15 years to save up for a 15% deposit; and 10 years for those in the rest of the country.

36% of those we surveyed recognise the rule, but only 10% follow it.

Financial rules of thumb I follow

We used our YouGov survey of 2003 people to find out how well these six financial rules of thumb work on the ground today.

The graph below reveals what percentage of respondents follows each of the six rules.

Where do these financial rules of thumb come from?

Pinpointing the moment you first came across these financial rules of thumb can be hard, but we thought it was important to dig a little deeper to find out.

Was it advice from parents and other family members, or was it from professional sources?

We found that 52% of those aged 25-34, and 42% of those aged 35-44, learned about general finances and financial planning from their families.

This doesn’t mean that people in those age groups are necessarily following that guidance. In fact 41% of those aged 25-34, and 41% of those aged 35-44 say that they don’t follow these financial rules of thumb at all.

Focus on wisdom, not details?

The chart below shows the results from all the age groups we surveyed, revealing that most shared the 25-44 age group’s view that financial rules of thumb shouldn’t be followed rigidly.

However, 53% of 25-34 year olds and 54% of 35-44 year olds still find financial rules of thumb to be useful guides when it came to money management.

The financial rules of thumb we investigated in our survey were likely passed down with the best of intentions – by parents and grandparents keen to share what worked for them.

Yet given (for example) that renting a one-bedroom home in one of the cheapest London boroughs typically costs 34% of the national median pre-tax pay, it makes sense that so few – 7% – of our respondents follow a rule that cautions against spending more than 30% of income on rent. Overall, the official statistics we’ve included in this article make it very clear that implementing advice from previous generations is now often out of the question.

None of this is a surprise in a month (May 2022) which saw Google searches for “I can’t pay my bills” rise by 1,049%. There are no easy solutions – and financial rules of thumb should never be one-size-fits all.

Perhaps official statistics – however cold or clinical – could provide a useful starting point for new and fruitful discussions between generations whose menu of economic options now differs so greatly.

The content in this article is for information only and is not advice. All content in this article was accurate on the date of publication shown above.

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