7 Quick Numbers To Fix Your Personal Financial Situation

By Mike


Author: Mike

When we talk about personal finance, there are several rules of thumb that can help you build a solid financial plan. Here are a few numbers to remember when you want to improve your personal financial situation.

Aim for a Credit Score of 750

A credit score may vary from 300 to 900 but most people have a score between 600 and 800. A great credit score will open the doors to get better rates on:

– credit cards,

– insurance (car, home, life, etc),

– personal loans including car loans,

– lines of credit and

– mortgages.

In order to benefit from the best rates available due to a stellar credit rating, you must aim for a credit score over 750. How can you do that? Well, there is no magical ways to improve your credit score. Here are the 5 major things that impact your credit score:

– Credit history,

– Current level of indebtedness,

– Amount of time credit has been in use,

– Credit inquiries,

– Type of credit experience (i.e. number of loans, credit cards, lines of credit and mortgages; the more diversified the better).

100 minus your age to determine your asset allocation

This is a classic in financial planning circles. While this financial rule of thumbs won’t fit for every case, the basic principle remains: The older you are, the less money should be invested in equities.

Fixed income (like bonds, certificates of deposit) will provide stability in your investment portfolio. At retirement, the last thing you want is to see your nest egg losing a quarter of its value in a single year. Those who are retired and didn’t follow this rule of thumb suffered tremendously in 2008.

8,6%: Dow Jones Yield since 1930 (including the 2008 crash!)

As a financial planner, I usually tell my clients the stock market average return is about 9%. It is important to have a realistic yield expectation. This will allow you to build a stronger (and more reliable) retirement plan and will also avoid belief in the Maddoffs of this world who promise double digit annualized returns at all times. The truth is: there are no free lunches in finance!

Another word of caution; 8.6% over the past 78 years doesn’t include management fees. Therefore, if you buy mutual funds, you will have to pay, what we call, MERs (management fees). Make sure to ask your financial advisor what are the fees and how they impact your investments.

70% of you gross income should become your revenue at retirement

This is another great rule of thumb in financial planning used in creating a retirement plan. Most people carry several expenses related to working (transportation, specific clothing, eating out, etc.). Once  retired, you should not have these expenses anymore. You should also be close to paying off your mortgage (we all hope!). Accordingly, 70% of what you earn before you retire should be enough to support your new lifestyle.

Don’t make the mistake of decreasing this amount when you reach 70-75 thinking you will do less activities and be traveling less often. It is true that you won’t spend in activities but chances that your health expenses will increase. Keep the same level of income (adjusted to inflation) in your retirement plan.

10% of your income should be saved for your retirement

In order to respect your financial plan and meet 70% of your income at retirement, one should save 10% of his gross income and invest it. This should be enough to support your lifestyle at retirement while putting 10% aside won’t kill you once you have done a budget.

This financial rule of thumb will vary depending on your age (and the age you want to retire) and your risk tolerance (that will influence your investment yield). These topics will be covered later on.

The Rule of 72

This is a quick mathematical rule to calculate how many years it will take for your investment to double depending on its yield. For example, if you invest $10,000 at a steady yield of 6%, your initial investment will worth $20,000 in 12 years. You simply divide the number 72 by your expected yield, it tells you how many years it will take to double your investment. So when you get a CD at 3%, you will need”¦ 24 years to double your investment!

25% of your gross income should be allocated to your mortgage/rent payment

This should be used as guidance for your budget when you are looking to buy a house or change apartments. Considering that you already have to save 10% of your income for retirement and pay taxes, taking an additional 25% of your revenue should be enough to provide shelter without jeopardizing your financial situation.

You still need money for food, transportation, utilities and don’t forget to put money aside for your children’s education! You can always exceed 25% for your house payment but be aware that you will have to sacrifice something else in order to pay for the house of your dreams.

I hope these financial rules of thumb will help! I am curious to know if you use any of them or if you use other personal finance rules of thumb?

Image source: Austin ampersand Zak

14 Responses (including trackbacks) to “7 Quick Numbers To Fix Your Personal Financial Situation”

  1. Melanie Says:

    Great article – money really is about numbers (pun intended)!

    I knew some of these – but didn’t know the one about equity asset allocation and age and usually allocate 30% to housing.

    And we save at least 10% to retirement. We want to retire early than the norm so we have to :-)

  2. Craig Says:

    I have been trying to hit some of those numbers passively but not going crazy into them. Either way good to look out and keep mention so you know what to strive for.

  3. JoeTaxpayer Says:

    The 70% replacement rate for retirement is one I’ve always struggled with. We have 3 large budget items that will go away prior to retiring. First, the mortgage, then college savings, finally, retirement savings. These three total about half our gross as we’re at about 25% savings, 15% mortgage, 10% college.
    Also, I’m starting to think not to count on social security in the equation.

    Good article. On my best reading list this coming Sunday.

  4. Mike Says:

    Congrats on getting a well balanced budget!

    However, you should also consider that you will get bored if you don’t do anything at retirement. Hence, traveling, eating out, hobbies or possibly doing major renovation will probably take 20% of your existing expenses. This is why we suggest 70% of your current gross income.

    As a financial planner, I did plan with 50% to 125% of current income of my client depending on the lifestyle the wish to have (and their assets ;-)).

  5. DDFD at DivorcedDadFrugalDad.com Says:

    Nice post– a good refresher for some, an eye openner for others . . .