{"id":1413,"date":"2021-02-12T19:47:26","date_gmt":"2021-02-13T03:47:26","guid":{"rendered":"https:\/\/dadspersonalfinance.com\/?page_id=1413"},"modified":"2021-11-14T16:36:39","modified_gmt":"2021-11-15T00:36:39","slug":"financial-rules-of-thumb","status":"publish","type":"page","link":"https:\/\/dadspersonalfinance.com\/financial-rules-of-thumb\/","title":{"rendered":"Financial Rules of Thumb"},"content":{"rendered":"\t\t
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Financial Rules of Thumb for everyday life<\/h2>\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t
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Investments<\/h3>

Rule of 72 –<\/strong> This rule states that you can determine how long it will take money to double based on the interest rate.\u00a0 Note that this applies to both the investing\u00a0 and debt side of the equation.\u00a0 So a fund of $100 at a 6% return will become $200 over 12 years (72\/6).\u00a0 Likewise a debt of $100 at 6% over 12 years will become a debt of $200 assuming that no payments are made.\u00a0<\/p>

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The 120 rule<\/strong>. To determine what share to your portfolio to invest in\u00a0 invest in stocks and bonds, merely subtract your age from 120.\u00a0 for stock and place the remainder in bonds.\u00a0 So if your 60 years old then 60% of your portfolio into Stocks and 40% into bonds.\u00a0 \u00a0 Some people will also use 110 or 100 for the subtraction yielding less money to be held in stocks.\u00a0 This rule has become outdated.\u00a0 I am not big on bonds as I haven’t made much money on them over the years. The 4% rule does call for some balancing using bonds but the threshold is low.\u00a0 For example 20%\u00a0 Read more on the 4% rule for the recommendations on how much to hold in bonds.<\/p>

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Budget<\/h3>

50\/30\/20 rule.<\/strong>\u00a0 Take your net income after paying taxes and multiple it by 59% to take care of expenses.\u00a0 30% of the take home is for your wants (desires) and 20% is for paying off debt or saving\/investment.\u00a0\u00a0<\/p>

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70\/20\/10 rule.<\/strong>\u00a0 You may also hear of a variation of the 50\/30\/20 rule called the 70\/20\/10 rule.\u00a0 70% of net pay is to take of expenses.\u00a0 20% is for savings\/investments and 10% for tithing (donations).\u00a0<\/p>

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Emergency Fund.<\/strong>\u00a0 Save 6 months of expenses for emergencies like car repair,\u00a0 loss of job, etc.<\/p>

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Retirement<\/h3>

The 4% rule<\/strong> –\u00a0 The result of a study by William Bengen to determine how much money can be spent by someone retiring at 65 years of age and living for a 30 year period in retirement.\u00a0 The study concluded\u00a0 that a person could reasonably spend 4% of his or her portfolio and increase that yearly amount by the inflation rate that occurred in the prior year.\u00a0 So for a $1M portfolio, the retiree could withdraw $40,000 the first year.\u00a0 If the inflation rate for that year is 3% then the following year, the retiree can retiree 3% more or 1.03*40000 = $41,200 in year 2 and so on from there.\u00a0 \u00a0<\/p>

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We can also calculate how much money we need in for a retirement portfolio by multiplying the yearly expenses by 25.\u00a0 So if I have 40,000 in yearly expenses then I am required to have a $1M portfolio.\u00a0 If I spend $50,000 in retirement then it is suggested to have a portfolio size of $1.25M.\u00a0<\/p>

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The 90\/10 rule<\/strong>.\u00a0 Discussed in the Retirement Manifesto at https:\/\/www.theretirementmanifesto.com\/introducing-the-90-10-rule-of-retirement\/ who gives credit to the Rock Retirement Club https:\/\/www.rockretirementclub.com\/.\u00a0 The idea is that prior to retirement we spend 90% of our time looking at financial issues and 10% of our time looking at nonfinancial issues.\u00a0 After retirement, we spend 10% of our time looking at the finances and 90% of our time looking at nonfinancial retirement issues.\u00a0 This rule feels a bit forced like someone just trying to coin a rule to get attention.\u00a0 The\u00a0 idea behind the forced rule makes makes sense however.\u00a0 We do spend move time looking at finances prior to retirement than afterwards.<\/p>

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FI Ratio.<\/strong>\u00a0 Another contrived rule which I have come across in slightly different versions which all mean the same thing.\u00a0 \u00a0FI stands for Financial Independence in this case.\u00a0 \u00a0But the question is do you have more passive income than expenses.\u00a0 For the FI Ratio, take the yearly passive income and divide it by the yearly expenses.\u00a0 If the result is more than 1 then you are bringing in more income than your expenses.\u00a0 Note that as a percentage, you would like to see the result be more than 100%.\u00a0 I first saw this at the Retire By 40 site at https:\/\/retireby40.org\/.\u00a0 It is another “forced” definition begging for attention.\u00a0 I include it here for completeness.<\/p>

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Real Estate<\/h3>

28%\/38% rule<\/strong> – What house payment can you afford?\u00a0 Multiply your monthly gross income by 28% and that figure must be greater than or equal to your PITI.\u00a0 Principal, Interest, Taxes and Insurance.\u00a0 It may also include the HOA (Home Owners Association) fee.\u00a0 Check with the mortgage company.\u00a0 That 28% is also called the front end ratio.\u00a0 The other ratio that the mortgage company looks at is called the back end ratio.\u00a0 This is the ratio of all your monthly expenses to your monthly income.\u00a0 This includes the PITI from above plus all other expenses including car payments, utilities, student loans, …\u00a0 These expenses must be no more than 38% of your total monthly income.\u00a0 To calculate these ratios just take your yearly pay and divide it by 12 to obtain your monthly pay.\u00a0 Multiply that result by .28 to obtain your front end ratio and take that same monthly income and multiply it by .38 to obtain your back end ratio.\u00a0\u00a0<\/p>

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How much house?<\/strong>\u00a0 A rule of thumb for buying a house is somewhere in the range of 2.5 to 4.0 times your annual salary.\u00a0 So a salary of $50K means a recommendation for a house that sells between $125K and 200K<\/p>

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Rent vs Buy Decision.<\/strong>\u00a0 From Paula Pant at https:\/\/affordanything.com\/is-renting-better-than-buying-should-i-rent-or-buy\/.\u00a0 \u00a0Divide the selling price of the house by the yearly rent (or total PITI payment).\u00a0 If the result is above 20 then hesitate before buying.\u00a0 If the result is greater than 25 then don’t buy unless you have strong nonfinancial reasons.\u00a0 If the selling price divided by the yearly payments is greater than 30 then run.\u00a0 \u00a0 Low price to rent ratios are good for buyers and high price to rent rations are good for renters.<\/p>

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1% rule<\/strong> – The monthly mortgage should be less than or equal to 1% of the sum of the purchase and repairs.\u00a0 So a $100,000 house with repairs of $20,000 should\u00a0 rent for no less than $1200 month.\u00a0 \u00a0Keep in mind this should be considered a back of the napkin sanity check which leads you to determine if you should do further due diligence.\u00a0 \u00a0This can be used as a guideline in both the buy and rent decision.<\/p>

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70% ARV.<\/strong>\u00a0 ARV is the After Repair Value When fixing and flipping Real Estate, make sure that the cost to purchase along with the repair costs do not exceed 70% of the market value for the property.\u00a0 For single family homes, we use the comps (comparables) pricing for similar properties in the same housing sub market.\u00a0\u00a0<\/p>

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Expense Ratio for MF.<\/strong>\u00a0 The rule of thumb is to look for an expense ratio of 50% as a sanity check on a multi family property\u00a0\u00a0<\/p>

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Life Insurance<\/h3>

10-12 rule<\/strong>.\u00a0 Your term life insurance should be about 10-12 times your yearly income.\u00a0 So if you make $50K per year then you should have a policy for $500-$600K should you pass away and no longer can provide for your family.\u00a0 Keep in mind that you should also have Life Insurance for both spouses even if one spouse provides care for the children on a full time basis.\u00a0<\/p>\t\t\t\t\t\t\t\t<\/div>\n\t\t\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/div>\n\t\t\t\t\t<\/div>\n\t\t<\/section>\n\t\t\t\t<\/div>\n\t\t","protected":false},"excerpt":{"rendered":"

Financial Rules of Thumb for everyday life Investments Rule of 72 – This rule states that you can determine how long it will take money to double based on the interest rate.\u00a0 Note that this applies to both the investing\u00a0 and debt side of the equation.\u00a0 So a fund of $100 at a 6% return […]<\/p>\n","protected":false},"author":1,"featured_media":0,"parent":0,"menu_order":0,"comment_status":"closed","ping_status":"closed","template":"","meta":{"nf_dc_page":"","_monsterinsights_skip_tracking":false,"_monsterinsights_sitenote_active":false,"_monsterinsights_sitenote_note":"","_monsterinsights_sitenote_category":0,"site-sidebar-layout":"no-sidebar","site-content-layout":"page-builder","ast-site-content-layout":"","site-content-style":"default","site-sidebar-style":"default","ast-global-header-display":"","ast-banner-title-visibility":"","ast-main-header-display":"","ast-hfb-above-header-display":"","ast-hfb-below-header-display":"","ast-hfb-mobile-header-display":"","site-post-title":"disabled","ast-breadcrumbs-content":"","ast-featured-img":"disabled","footer-sml-layout":"","theme-transparent-header-meta":"","adv-header-id-meta":"","stick-header-meta":"","header-above-stick-meta":"","header-main-stick-meta":"","header-below-stick-meta":"","astra-migrate-meta-layouts":"default","ast-page-background-enabled":"default","ast-page-background-meta":{"desktop":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"ast-content-background-meta":{"desktop":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"tablet":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""},"mobile":{"background-color":"var(--ast-global-color-5)","background-image":"","background-repeat":"repeat","background-position":"center center","background-size":"auto","background-attachment":"scroll","background-type":"","background-media":"","overlay-type":"","overlay-color":"","overlay-opacity":"","overlay-gradient":""}},"footnotes":""},"class_list":["post-1413","page","type-page","status-publish","hentry"],"yoast_head":"\nFinancial Rules of Thumb - 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