Financial Rules of Thumb and Tools

Updated: Dec 1, 2019

Here are some of the short-cuts, that you can use to arrive at your goals:

Withdrawal rate (adjustable to reflect inflation) = 4% $1,000,000 in lump sum can generate $40,000 per year

50/30/20 Rule = 50% of your income goes to necessities (housing, utilities); 20% goes toward financial goals (retirement, college savings, house down payment); and the final 30% is for wants (dining, entertainment) If you make $5000 per month, $2500 (50%) should be allocated to necessities, $1000 (20%) toward retirement, college savings and emergency funds, and the last $1500 (30%) is for wants – dining, entertainment, a new car, a computer, your weekly Starbucks

Ballpark asset allocation = 120 minus your age is the percentage of your retirement savings that should be in stocks If you’re 30, then 90% should be in stocks, 120-30=90 – this used to 100 minus your age, but with longer retirements due to growing longevity, 120 is a more appropriate figure

Rule of 72 = number of years for a lump sum to double at a given interest rate 8% will double a lump sum in 9 years (72 divided by 8) 6% will double a lump sum in 12 years (72 divided by 6)

Aim to save 1x your annual salary by age 30; 3x by age 40; 6x by age 50; 8x by age 60; and ten times your salary by age 67 when you will presumably retire

Approximate long-term (over the last 100 years) returns: Equities (stocks) = 10% Government bonds = 5% Cash (treasury bills) = 3.5% Real estate prices = 4% Gold = 4% Inflation = 3%

Have at least 6 months’ worth of expenses in an emergency fund Say you make $5000 (as in the 50/30/20 rule above) and spend $2500 on necessities and $1500 on wants, with the rest going to savings - then you’d want $24,000 in an emergency fund ($2500+$1500=$4000x6 months=$24,000) Some might argue that you don’t need six months’ worth of “wants” in your emergency fund, but are you really going to go six months without eating out or going to a movie if you were unemployed?