How much should I save for retirement? How much house can I afford? How much should I save for emergencies? These are important questions to consider for your financial future. Here’s a breakdown of the money rules of thumb that should help shape your financial plan.
Rule of thumb: at least 10% of your total pay every year
Without this rule, we find many people save a smaller percentage. You want to establish this practice as early as possible in your working career – ideally saving for 30 working years – so that as you earn more over time, your savings amount automatically grows with your income. The 30-year mark tends to aggregate a long-term savings account value that can really help in retirement.
How much house can I afford?
Rule of thumb: equal to or less than 2.5 times your total combined income
The problem with this rule is that it doesn’t take into consideration factors such as buying residential real estate property that is dramatically undervalued and would allow for greater long-term appreciation.
Interest rates can also change this a bit. They’ve been so low the past few years on a historical basis that mortgage payments may be more affordable with super low borrowing rates, meaning you can borrow more and might be able to spend more than the typical rule allows.
Rule of thumb: 6 months of your household expenses
Misfortune can strike at any time, which is why you need a financial cushion. However, saving six months of your household expenses isn’t always the best option. In some cases, we may favor saving less because setting aside a big pile of cash in a bank account that’s earning little to no interest isn’t as favorable long-term.
Also, certain professions have greater income stability and predictability. If this is the case for you, we may recommend as low as three months. Or, if you’re paid based on sales or commissions, your need to hit a six-month target may be more important than someone who has greater job and income stability.
Percentage of stocks and bonds in your portfolio
Rule of the thumb: the same amount as your age
The percentage of bonds in your portfolio should be equal to your age and the rest should be stocks. This rule helps create an understanding of how your portfolio should be more or less aggressive over time.
Where we differ is that we believe a global tactical approach to investing can provide levels of diversification and balance to help weather difficult stock market environments over the long-term. Some people are more willing to accept portfolio volatility and can tolerate stock market ups and downs. Those who cannot often make poor investment decisions if their portfolios are too aggressive and may need to be more conservative regardless of age. So, you should consider your investment experiences and long-term objectives before using this rule to determine your optimal investment allocation.
By Michael Carlin, AIF®