You could apply the 40% rule to personal finances as well. If your income/salary is increasing 20% a year, put 20% into savings. If your income is increasing 5% a year, put 35% into savings.
I disagree, in personal finances you aren't afforded the same kind of burn rates because there isn't an investor model for individuals. If my salary has increased 100% YoY for the last 3 years, I would be in a troubling amount of debt.
This applies in reverse as well, if you take a salary cut you likely aren't going to be able to save more money as a result.
For personal finances I think its better to tease out a baseline amount for expenses and save everything above that, re-calibrating occasionally as required.
This is exactly what people do when they go to school: they take on huge amounts of debt in order to make their income grow by >100% YoY for a few years.
Very few incoming college students know enough about finance or exactly what different choices will payout to make smart trade-offs in this area, but this reasoning is pretty common with MBA and Law School students. Occasionally it even works; I've known a few young lawyers who ended law school with $200K in debt, but it was paid off within 4 years and their income was roughly 8x what it was before law school.
On writing my response I realized school was probably the one time where this sort of strategy would be appropriate for an individual. At the same time, school is a much higher risk proposition (in many cases) and involves much more time and debt than the 40% guideline accounts for.
You also have to keep in mind that most people who finish law school don't get big law jobs that allow them to pay off loans quickly. The same holds true for MBAs and most PhDs. About the only advanced degree that has some level of income guarantee (for now) is a MD. So while school can fit the 40% rule, it rarely does.
Not sure why this won't still work in theory.
100% YoY increase:
Salary Year 1: $100 - you are allowed to go $60 into debt
Salary Year 2: $200 - you are allowed a further $120
Salary Year 3: $400 - you are allowed a further $240
Salary Year 4: $800 - your total debts are still around half a year's salary, which is only modestly troubling - banks would most likely be happy to service your debt at a competitive rate.
If you recognise your period of fast increasing salary is over, you are now advised to save $320 - which pays off much of your debt.
In practice, there are some other problems which you partially recognise - depending only on salary doesn't give you a diverse portfolio of investment; salary is more likely to suffer an unexpected shock than business income; expenses are difficult to reduce.
This is a good analogy if the debt is invested in your personal financial growth somehow, for instance through education or perhaps actual investments, but a terrible analogy for the kind of deficit-spending most people do, like on cars and high living expenses.
A loan is typically the textbook definition of an investment..
Banks give a student X dollars, after college the student pays X + i. The bank takes some risk and receives more money than they started with. I'm not sure how it wouldn't be an investment.
