5 financial shortcuts that you need to know
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It's no wonder that there are hundreds of thousands of articles about money and financial planning tips. Everyone knows how important it is to have strong financial skills and an understanding of what steps you need to take for a healthy financial future.However, it always seems like the financial community thrives on creating an endless array of numbers, facts and figures that are complex and complicated. Which ones do you follow? Which numbers work for your own personal financial situation?We've cut right to the chase and compiled a list of the five financial rules that you need to know. These rules are easy to follow and teach you tips to better your finances right away.
Let's face it, who loves to budget?Not many people, that's for sure, and yet it's probably the single most important step you can take to better your financial future. There are so many different ways to budget, do you use a mobile app or a DIY approach, and thousands of articles online about the "best" way to create your budget.The sad truth is that many people, who have good intentions and start a budget, quickly determine it is too hard or too painful to keep up with, so they abandon it all together. Perhaps this is why so many people hate budgeting.If you're struggling to figure out exactly how to budget, start by incorporating the 50/20/30 Rule. Here's how it works:50% of your take-home pay should go to your fixed expenses – those expenses that you have to pay like your rent, mortgage, groceries, car payment, etc.20% of your take-home pay should go to your savings- this includes your contributions to your 401(k), IRA, ROTH and your high-yield savings account for emergencies (hint, see the next rule).30% of your take-home pay should go to your flexible (or variable) expenses- things like eating out, credit card payments, gym memberships, subscriptions, entertainment, etc. Now, this is usually the place where most people's budgets breakdown, so you're going to want to pay close attention to these expenses to keep your budget in check.
Remember when your car broke down, and you needed a spare $1000 to fix it?
What about the time that you got stuck in the airport because of a cancelled flight and needed to come up with a spare $500 to get you home fast?What about that time when you owed more money for your taxes than you had saved?There are so many times in life when something goes wrong, and suddenly you need a chunk of change to remedy the solution. Starting an emergency fund, and saving 3-6 months of your fixed expenses is what the 6-Month Rule is all about, and will come in handy in these emergency situations.If you are new to savings, you'll want to open a high-yield savings account to get a better interest rate for your savings than at your current bank. Capital One 360, Ally Bank, and Synchrony Bank are a couple of examples of popular high-yield savings accounts. These are online banks, but it's super easy to open an account and transfer money.It's possible that it might take you a while to save six month's worth of expenses, so break it down into smaller bits that you can incorporate into your budget each month.
The old rule of thumb was that you should have a 60/40 split of equities (stocks) and bonds in your retirement portfolio – your 401(k), IRA, ROTH, etc. It was an easy rule but isn't always the best percentage breakdown for your age.The 100 Rule is an even easier way to figure out what the best percentage breakdown for equities and bonds should be given your current age. All you need to do is take 100 and subtract your age. That's it.For example, if you were 35 years old, you'd want 65% of your portfolio in equities and 35% in bonds.Each year that would change of course, which is a great reminder for you to get back in touch with your retirement account and make sure it is performing the way you would like.
Retirement might seem like a long ways away for you, or even a word that seems silly talking about in your current life stage. No matter what age you are, it's never too early to stick the 75-80% rule in the back of your head for future use.The 75-80% Rule refers to the percentage of your current income that you might need in your retirement years to live "comfortably." However, many financial experts argue that this rule is not the case anymore because everyone's idea of "retirement" is completely different.You might want to travel and need extra money in retirement, or you might want to move somewhere with a lower cost of living and need even less income. It's not a perfect science. However, it's a good starting point to give you some idea as to how much money you would need every year.Remember, most of us will live 20-30+ years in so-called "retirement." This just means that you've got to spend your working years supercharging your retirement savings in your 401(k), IRA or ROTH.
The next time you're at a boring party and want to wow the crowd, break out your 72 Rule skills. This is an oldie but goodie, and most people spend hours trying to figure the answer to what this simple rule can tell you.The Rule of 72 easily helps you estimate the number of years it will take for your money to double at a given interest rate.For example, if we divide 72 by 7% interest rate, we get 10.3 years. That is how long, approximately, it will take for your investment to double.You can also work this rule backwards. Let's say you need to know what interest rate you would need to earn for your money to double in 10 years. Easy enough, take, 72/10 and you get roughly 7.2 years.Why would you need to know this cool trick?You might be saving up for a downpayment for a new car, or even for your first home purchase. You can use this rule to calculate how long it would take for you to save up the down payment in your head rather than using a complicated calculator.These are some easy rules to store away in your brain that can help you on your financial journey. You'll never know when you'll need to whip one of these out. While they aren't exacting, these rules can certainly help you plan for your future and dial in on your current financial planning. Learn them, make them your own, and share them with your friends and family.Photo: John Fischer
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