Came across this article from Kiplinger this morning, and can’t say I’ve heard of half these rules of thumb before, haha… Maybe that’s why they’re so breakable?! :)
They’re bolded below, along with my own two (free) cents, and an attempt at comparing them to our own finances to see if we’re on track or not :)
Anyone following any of these?!
“Spend no more than half of your income on living expenses, keep discretionary items to 30%, and save the rest.”
People sure would be better off if they followed this, but I have yet to run into anyone who actually budgets off percentages, do you? In theory I think it all makes sense, but I tend to just cut back in all the areas I’m able to cut back in (some months it’s good, and others not!), and then at the same time stash as much savings as I can each month as well.
Maybe it breaks down into similar %’s over time, I’ve never really run the numbers, but so far it’s been working out well, at least since I’ve wrapped my head around all this stuff a decade ago :) Ask the old me though and I couldn’t tell you *what* I was spending on, no less the pie percentage!
At any rate, here’s where our current finances would break down if it was pie’d up like that:
- Living expenses: 60%
- Discretionary: 20%
- Savings/Investments: 20%
So not too far off, actually! Although there’s a number of items in there I had to guess on as wasn’t sure what category they’d fall into… (says the guy who blogs about finance for a living!!)
“You can afford a home that’s two to four times your annual gross income.”
Well this one should be an easy one to compare to since we literally just bought a house!! :) Doing the math on this bad boy pushes us out into the $320,000 – $640,000 range, where I’m glad to see we’ve landed wayyy on the lower end of the scale here – woo!!
Although if you recall, we did get approved all the way up to $800,000 from one source, so it seems pretty accurate at least on the lender’s side. And not to be confused with what you can *actually afford* btw, since the banks are happy to loan out as much as they can get away with because it means more $$$ for them!! So don’t fall for that trick like many of us have over the years!
“You need life insurance equal to eight to 10 times your annual pretax income.”
No idea where this figure comes from, but if we stayed in line with it we’d need to have about $640,000-$800,000 each, of which we’d massively fail at since we only have $350,000 of life insurance each ;) Though it was initially set up to mainly cover our *mortgages* in the event one of us passed pre-kids, so it wouldn’t be a bad idea to reassess here again…
Although isn’t the point of financial freedom to be *fully* sufficient without needing outside help unless you wanted it? We’re far from that point at the moment, but it would be yet another perk if you can start clearing away some insurances since you’d be able to fund a lot more during your demise ;) And not talking about *health* insurance btw – ain’t no way I’m giving up that with our jacked up system here!
Curious though – how many early retirees out there are still carrying life insurance? Why or why not?
(In other fun news – I recently read that they call it “life” insurance vs “death” insurance because it’s more appealing to see and better odds of people signing up for it, haha… Which is probably true, unless you happen to enjoy thinking about death like some we know! ;))
“Save one-third of the cost of college.”
I’ve never thought of the *ratio* when it comes to saving for college (just always gone with the “save as much as you’re able to” route, and we’ll figure it out later when it gets closer! Haha…), but probably better to have a more developed game plan in place ;)
Per that same article by Kiplinger:
“Under this rule of thumb, you pay for a third of the cost of college from savings, pay a third from current income and financial aid, and borrow a third using a combination of parent and student loans.”
Anyone care to share their perspective or strategy with this who’s in the thick of it all?! Obviously it would be great to have ALL of it taken care of by the time they leave your comfy nest, but we all know it’s hard enough to stay on top of our other massive goals in this Game of Life, so I think if you’re at least saving *something* towards it you’re allowed to be semi-proud of yourself… At least that’s the rationalization I’m telling myself ;)
“You’ll need 70% to 80% of your preretirement income to live on when you retire.”
Oh boy!! The magical retirement number question!! EVERYONE RUN FOR THE HILLS!!! Haha…
You already know what I’m going to say on this one so we won’t linger on it too long, but it’s always fun to refresh ourselves for all the new people to the scene :) And to those people we say, *pay attention to the EXPENSES of your future planning – not your INCOME!* As you can very well be poor with a million dollars hitting you in the face, or rich with $10,000 in the bank – all depending on the quality of lifestyle you want or need later on!
And while we do have a common “rule” here in the FIRE community – 25x your yearly (forecasted) expenses – there’s still ALL kinds of variables you can throw into the mix and tweak to your heart’s desire, so it’s really about finding the starting point that seems best *to you*, and then adapting it as life moves on and changes… And it will always be changing, believe me!
And with that, I’m already feeling a bit re-tired, haha…
Finally a place to insert this meme I’ve been dying to use!!! ;)
What do you think?? Any rules here worth implementing or gonna pass?
Looks like we accidentally hit 2 of the 5 here, but don’t think it’ll be something we’ll be incorporating into our strategies anytime soon…
Always good to hear outside perspectives though!
Jay loves talking about money, collecting coins, blasting hip-hop, and hanging out with his three beautiful boys. You can check out all of his online projects at jmoney.biz. Thanks for reading the blog!