Recently, this article on BrighterLife.ca caught my attention – 15 common financial rules of thumb. Author of this article Dave Dineen offered his take on these rules, and today’s post will offer mine.
Your retirement income needs to be 70% of your working income.
Largely agree, this is one of the more reasonable financial rules of thumb. While some big, current expenses are expected to disappear in retirement (mortgage, RRSP contributions), new ones may appear (rising healthcare costs, travel). Our goal is to save for about 50% of our working income, excluding any contributions to workplace pensions, excluding any projected assistance from any government programs.
Keep an emergency fund equal to six months’ income.
Somewhat agree. A six-month fund would be very handy in a job loss situation but it’s very difficult to rationalize this sum of money and the opportunity costs associated with this; getting this amount of money working for you. That said, we have a few thousand saved up in our emergency fund now, we hope to have this amount eventually, at some point.
Don’t pay more than 3.5 times your gross annual income for your house.
100% agree. When it comes to mortgage debt, I can’t imagine having more than what we have on the books now. Our mortgage debt remains over this amount and I want it dead. I can’t imagine what some 30- and 40-somethings are willing to pay for some mortgages in Toronto, Calgary and Vancouver now.
Don’t invest more than 5% of your savings in any one stock or bond.
Largely agree. Investors need to diversify and I need to do more of this myself, using low-cost broad-market indexed Exchange Traded Funds (ETFs). I think I have a few stocks in my portfolio that are approaching 5%, but not very many.
Accumulate 20 times your gross annual income, then retire.
20 times? 100% agree. Realistic for 99.9% of Canadians? No way. If I can save 10 times (my annual gross income) I will be very happy.
Never touch your retirement savings, except for retirement.
I hope you know my answer if you’re visiting my blog but if not, 100% agree.
In retirement, you can sustainably live off of 4% of your next egg.
Largely agree. I’m hopeful our retirement portfolio will yield about 4% every year, on average, and we will not need to touch our capital until old age. I figure we might need our capital for any significant, unexpected healthcare costs. Hopefully not.
If your employer matches your contributions to a workplace savings plan, go for it.
100% agree next financial rule please.
The percentage of your portfolio in bonds and fixed-income investments should be equal to your age.
100% disagree. This advice is out-of-date and furthermore does nothing to reconcile with an investors’ objectives. I used to think this was a good rule of thumb but I’ve changed my tune considerably. I can’t see how some 50- and 60-year-olds would welcome this advice in today’s bond market.
Total home ownership costs shouldn’t exceed 30% of your gross income.
100% agree. Owning a home is expensive and paying too much to own one doesn’t make any financial sense to me. There is more to life than home- moanership. I struggle with how the banks calculate their consumer debt-service ratios for lending purposes.
Your total debt servicing costs shouldn’t exceed 40% of your income.
100% agree. Debt can be a wealth-killer and limit your cash flow options. See above.
Don’t plan to retire with debt.
100% agree. Debt sucks. See above.
You need to have x times your annual income in life insurance.
100% disagree about “x” insurance. I write about life insurance often on my site, I’m learning more about insurance every year because of it but I think lots of life insurance only makes sense when you have lots of, or many liabilities in your life from which your catastrophic loss would hurt your family financially. Everyone’s needs are different, which is a good thing, and life insurance professionals are there for that. If you can afford to self-insure great but I suspect that would be for the minority of working Canadians. You own what you need.
What do you think about these 15 financial rules? What do you think about my answers?