“Price is what you pay; Value is what you get.” – Warren Buffett
Rules of thumb are cheap and easy. Up front, they cost you nothing. In the long run, they could cost you significant losses, bad purchases, too much spent or too little saved. We started the series stating a rule of thumb is “a principle with broad application that is not intended to be strictly accurate or reliable for every situation.” Broad means it applies to the masses. If you’re reading this, you’re probably not average in education, income, occupation, etc. So that means the advice you are given should be specialized, specific and you probably won’t find it on Google… That’s for the masses. Further, I’d argue that with rules of thumb can be damaging for our typical reader. And without proper financial advice, you get what you pay for.
Let’s take a moment and with each rule of thumb and what to you should be thinking about.
- A house should cost less than 2.5 x your income.
Plan ahead, seek specialty mortgages, analyze your budget, reduce redundant expenses. I’ve seen people afford homes 4.5x their income when their neighbor can barely afford one 1.5x their income. The difference is planning.
- Save at least 10% of your take-home income for retirement.
Use compound interest over your entire career so you can be “work optional” years ahead of your colleagues. The best time to start investing is 20 years ago, not because 20 years ago was great, it’s because time can be your greatest ally instead of a dreaded foe.
- Have at least 5x your income in life insurance.
Do you even have an insurable need? You pay a commission to buy insurance, at least get advice to tailor it to your need, not a salesperson’s commission. Planning helps you avoid wasting money on life insurance, it’s best use is only available if you die. Proper use helps not just for your family, but your savings, expenses and future wealth.
- Pay off high-interest credit cards first.
High balances can be more dangerous than high interest. Credit cards are financial quicksand when used improperly. 0% financing can be a time bomb if ignored. Be aware and plan pay-offs so you can leverage your finances, not rob from your own financial future.
- The stock market returns 10% per year.
Your portfolio is not the stock market. It should be built for a specific reason – a work optional lifestyle, a lake house, buying some land, your 40th birthday trip around the Mediterranean (yes, that’s for you Vik!). And the stock market is extremely volatile, unpredictable and if you rely on the US stock market for instance when you need your money is the only thing that matters and when you need it. If you saved for 10 years ending 2010, the “stock market” would have made you 0% minus fees.
- You should have an emergency fund of at least 3-6 months of household expenses.
Emergency savings are essential. How much needed varies radically. If you have a stable income 6 months of expenses is possibly too safe. If you have erratic income, that amount is extremely risky. Emergency cash should be just that – cash. It should be allocated to what you need it to do. Too much and you’re giving up too much down the road.
- You should only pull 4% of your assets as retirement income.
Where your assets are is a big determinant of retirement income. Are all your assets retirement assets(IRA, 401k, pension)? Do you sell your company and all are from cash and not your 401k? 4% from one is very different from the other. Tax location of your assets is incredibly important and planning effectively how much of each type you have can increase your retirement income.
- Your age should represent the % of bonds in your portfolio.
No. Just no. Bonds are necessary for most portfolios to provide stability and liquidity. However, the longer we live, the worse this rule becomes, especially if interest rates continue to go up but never get “high.” Allocations should be tailored to your needs both now and in the future and should be dynamic to keep up with the changing world.
Financial advice is the not-so-subtle theme in this series. I’m not saying you can’t make great decisions on your own and get solid results without consulting a professional. I’ve met some great people who spend a lot of time researching and come to sound decisions and will never need my help. That works for them. However, think of this, I’ve spent tens of thousands of hours honing my expertise. Through conversation, education, credentials, relationships, success and failure, laughter and tears. All that I have endured for the sake of helping my clients pursue a better outcome.
When it comes to major financial decisions, what makes more sense: Spending hours of your time to get comfortable enough but not know with certainty that it’s best? Or to rely on the guidance from someone who’s been there hundreds if not thousands of times that can get you there significantly faster with much higher predictability and likelihood for success? I’m sure your time is valuable; it may not be well spent outside of your passion or expertise.
We’re passionate about financial planning and healthy financial decisions at Engage Advisors. If you would like to know more about our planning process or simply want to break down some of the rules of thumb, please call Ryan Forster at 913.681.9155 or email firstname.lastname@example.org.
**Engage Advisors, LLC is a Registered Investment Adviser. This platform is solely for informational purposes. Advisory services are only offered to clients or prospective clients where Engage Advisors, LLC and its representatives are properly licensed or exempt from licensure. Past performance is no guarantee of future returns. Investing involves risk and possible loss of principal capital. No advice may be rendered by Engage Advisors, LLC unless a client service agreement is in place.