This blog contains some simple tips and advice from two regular guys. We're not accountants, financial advisors, or brokers, so follow, ignore, or discuss our ideas as you see fit.

Friday, January 4, 2008

Modern financial rules of thumb.

Posted by Matt

By now most everyone knows WHAT they should be doing financially; things like watching your spending and saving for retirement. The questions that arise usually center around HOW MUCH?

Am I saving enough for retirement and how does my nest egg look so far?
Am I carrying too much debt?

These are the kinds of things that can be explored in-depth with complicated financial spreadsheets, but most people aren't that interested. If you want a quick rule of thumb, check out the Newsweek article a friend of mine passed along. I thought it would be fun to see where I stacked up.

Household income: I learned from the article that our household income is safely above average, although I don't think that people should really be that concerned about where their income is compared to other people's. It is more important to make sure that your spending is appropriate for whatever income you have. At least the article didn't list an arbitrary income goal, although they did mention an outdated rule of thumb that suggested your income in thousands should equal your age.

Minimize credit card debt: We pay off our full credit card balance every month, but I didn't take any pleasure from learning that that put us $10,000 ahead of the average US household. It is more than a little scary to think that so many people owe that much on credit cards.

Debt equal to twice earnings by age 30: I was amused to read that age thirty is supposed to be the debt high-water mark. That was probably right about the age where I finally got back to absolutely ZERO debt after paying off my student loans and car (and before buying a house). Our current debt is WAY past the "double our earnings" mark, but only until we sell our previous house. After that, we should be about on track as the mortgage on our current house is the only debt we will have. The article recommends getting to zero debt by age 65, but I hope we beat that deadline!

Saving 12% of income: check. I got there a year or two ago and just bumped up to 15% in 2007. That's probably a good thing as my retirement account only surpassed my income less than six months ago. I'll probably need the extra boost if I'm going to get to 1.7x by the time I'm forty (I'm 36 now).

Housing expenses below 28% income: Not currently; that darn second mortgage payment again, but we should fall under the wire after selling the house and paying it off.

The eat and sleep test: This was a quaint little idea, although I have to point out that you can eat well and sleep well; you just have to put them both near the top of your priority list. And shouldn't they be?

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