6 Personal Finance Numbers that are Bullshit!

Handy little rules of thumb, sound so smart but are so dumb.

4% (the 4% rule)

You could argue all day long about this (and people do!). Try reading the paper on which it was based. But how can you tell now what the maximum you can spend tomorrow and adjusted for inflation for the next 30/40/50 years with 100% certainty?

0% (APR or interest free)

Whether it’s cars or kitchens; there is no such thing as interest free credit. You are just paying for it up front and paying it back in installments. If you are a cash buyer you can often get steep discounts compared to those who can’t. But in some areas (like cars) all the money for the seller is in the selling of finance and not the product. And if you are the sort of person who needs to borrow to afford life’s essentials, you might want to save up before you splash out which brings me on to…

72 (the rule of)

Two investments that pay 4% and 8% respectively. Divide 72 by 4 (or 8) and find out how long it will take to double your money – 18 or 9 years. That’s handy but it’s also no true – the 8% investment may be riskier and return of capital is more important than return of capital. The maths of 72 are correct but don’t forget risk!

3 (month’s contingency fund)

This is often said to be the bedrock of FI to help you  cover out of the blue bills – I’ve even heard that for retirees 2 years spending in cash be lying around. Whilst having money available if you need it is important, keeping cash is an opportunity cost. It might be better to invest your money and rely on an arranged overdraft when needed. For example, if you keep £6000 in cash earning 2% that is £120 a year. But that could be invested earning 8% per year (and we won’t even compound that) or £480 a year. If you do need £6000 in a hurry at a usurious 20% APR it would take you over 100 days in the RED before you start to lose money. It’s a question of cashflow at the end of the day.

25 (year mortgages)

When you sign up for a mortgage the typical term is 25 years but these days most mortgage terms last for as long as your mobile phone contract. 2 year teasers are the way to go to avoid being booted off onto the SVR – often doubling interest charges. Of course, if you house goes up in value, you can just remortgage to release your money to spend, just reset that mortgage to 25 years – bonus points if it’s Interest Only!

Half your age%

Pension pundits say that you should be investing in your stakeholder pension at a rate of half your age in percent. A 30 year old should stick 15% of her salary in an a 60 year old should put 30%. Whilst this is easy to remember, it’s too simplistic. First of all, it might be wholly insufficient to live off when you are old (assuming you spend every other penny). Also since pensions are a way of deferring income, maybe you want that money now!!! For lower rate tax payers, an ISA is not much worse than a pension and a LISA might be right.  Remember, you can’t retire early off the back of pensions (as I know). Do your own research and work out what’s best for you.

Good luck, GFF


  1. I prefer to use the natural dividend yield as my “safe” withdrawal rate rather than 4%, but 4% is still a useful guide when UK dividend yields are close to that!
    Half your age as a pension contribution is probably a useful line when advising someone who is under 30 to make a start. It’s probably too off putting if you are much older.

    Liked by 2 people

    1. natural yield – what do you do when your cost of living rises faster than your dividends?
      I’m following a similar path, it’s easy to say that if your spending = dividends you are doing fine, but it’s no predictor or your future.


  2. So far in draw-down dividend income has grown faster than expenditure, and both are above RPI inflation. Currently expenditure is 20% below dividends so there is some scope for our cost of living to rise faster than our dividends in the future before there is a problem. Then there is some scope to switch to higher yielding investments (but that could reduce future dividend growth). We could also spend a little of the capital when markets were up, but I’d probably rather review and reduce expenditure.


    1. that’s a nice position to be in – we get most of our dividends/interest from VCTs and P2P – not exactly the most reliable of sources and often returns are paid for out of capital.
      chasing yield is a slippy slope!


  3. I’m with you on all of them, apart from the 3-month contingency fund. Not having one was a huge reason why I was in debt for so long. I was regularly over my overdraft limit (and paying the fees) and paying minimum amount on my maxed out credit cards…

    As I’m over 80% invested in equities, I don’t mind the loss of opportunity of my 3-months’ cash stuck in low interest accounts.

    Liked by 2 people

    1. thanks – running on your overdraft is an expensive hobby. But I can’t see myself always keeping £5k in the bank as a contingency – although I do have roughly that in regular saver accounts (I suppose that counts)


  4. This was a really good post! These are all things I hear a lot in the personal finance world, and I think you make really good arguments for how these may not necessarily be best for every individual. I’d never heard of the half your age rule until just now–I’d just always heard the 15% rule–which to be quite honest, is probably a lot of money for young workers to start. We don’t have many pensions for new workers in the States anymore, yay 401k or ROTH, but the half your age rule may motivate new investors to get the ball rolling before investing something more substantial.


    1. it does depend a lot on the tax/pension rules where you are and your own circumstances.
      For many people, over paying into their pension can push back FI as the money is ring-fenced until you are around 60!


      1. We have some accounts like that for the most part. I’m definitely seeking FI and hoping to achieve it in the next decade (27 now)…not so much on the RE part (except for maybe at 60). I could see how putting your money away when it’s inaccessible could harm the FI aspect. I just wanted to say that this post was really valuable!

        Liked by 1 person

  5. Hey, this is a really nice post. I’d never heard the ROI rule of 72, but it is definitely an example I would use again in the future!

    I agree with some other comments here, you’ve brought to light some really interesting points and it’s fair to say that there is no ‘One size fits all’ in Personal Finance!

    Liked by 2 people

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