Financial rules of thumb are a helpful way of keeping aligned to your goals. They allow you to save time and make quick decisions when you may not have the necessary information or time to decide. When in doubt, rely on your rule of thumb.
They are personal and change as your stage of life, financial status and goals change. Although there is room for exceptions, your financial rules of thumb give you a line of thinking that links in with your current situation and provides a baseline for decisions.
Below is a sample set of Financial Rules of Thumb for an ambitious person in their late 20s. For some, the logic is added to give an idea of why the rule is this way.
A mortgage should not last into retirement.
Get a fixed rate for the first 5 years. The early years of your mortgage will typically be a time of more change than when you are older. When you are going through transitions that can be financially challenging, you don’t want your mortgage payments fluctuating with interest rates. This is a straightforward way of lowering complexity and stress.
Refinance if mortgage rates drop by 1% or more.
Mortgage payments should not be more than 35% of your income.
Never act as guarantor on a loan.
Be wary of partnerships (friends, family, etc). Understand joint and severally liability.
Property is a long term investment. It takes roughly 5 years to not make a loss on selling. With the taxes and associated costs such as valuations, conveyancing, moving, stamp duty, legal fees, and insurance; buying property is more expensive than the ticket price. Considering this, you need time to recoup your investment.
Pay the minimum and borrow as much as they’ll give you, or go all cash. Paying 10% extra in a deposit does not give a large enough reduction in mortgage payments to outweigh the benefits of having extra cash in savings or investments. If you are going to be cash strapped in the first year of home ownership, you may be better off paying less down and taking on more debt. Mortgage debt is more favourable than most kinds of debt. A mortgage free property is the next best solution.
Interest-only loans are for investments or businesses, not individuals.
Pay credit card debt at month end.
No debt on depreciating assets. Consumer/non-productive debt should be avoided.
Don’t sign as a guarantor on a loan. Don’t tie your finances to someone else.
Insure what you can’t afford.
How much insurance is needed; Before 30 and no kids, low. After 30 with no assets or kids, low. Once you have kids, for first 20 years, high. After 30 with assets and debt, enough to cover debt if you intend on leaving the assets to someone in a will.
Save minimum 10% of income.
Emergency fund should be €1k minimum. If job looks riskier or possible risks more likely, go to 3-6 months of expenses in emergency fund.
Don’t hold too much cash, unless there is a goal that requires this such as buying a home.
Bank a raise. When you get an increase in income, increase monthly savings.
Set up a pension.
10% minimum contribution of income at all times. This includes company contributions. Over the course of your career, this will build and compound to be a nice sum. Although not the only thing needed for a retirement plan, setting up a pension early can make everything easier. Lots of tax benefits and time for investment growth work in your favour.
Put in max contribution the company will match. Not doing this is throwing away free money.
My retirement comes over my kids education/wedding/first home. Your children can save, borrow and delay certain events. When you get to retirement you may not be able to earn, borrow and time is not on your side anymore. You need to prioritise yourself.
Never touch retirement savings for anything except retirement.
Know your biggest risks (job security, health, kids, family)
If you have children or other dependents, you have a moral obligation to have life insurance.
Diversification. No more than 10% in a sector, no more than 5% in a stock.
Diversification doesn’t matter until 50k in assets. When you are starting to invest the numbers will start small and grow slowly unless you have a high income or other assets. Although it would be better to be diversified, you can overweight early due to one successful asset. Once you hit the 50k mark you need to rebalance and diversify.
If your job is exciting, your investments should be boring. If your job is boring, your investments can be exciting (but don’t have to be).
10% limit on play money. You may want to invest in individual stocks or investments. Your limit for this “play money” is 10%. This is for speculating, and trying to be a stock market genius. Otherwise, play it safe and diversify.
If in doubt, index.
Focus on costs. Low costs index are the default option for investing.
Property is not a passive investment.
Passive income takes time to build.
Think in portfolio terms. A common mistake people make is mentally segregating their investments, rather than thinking of all their assets and liabilities as part of one portfolio. The reason you need to think in terms of your total portfolio is to allow you to ensure you are: investing to meet your goals, within your risk tolerance, diversified across assets classes and sectors, not missing information that is important to the whole picture.
Check you tax is correct at the end of the year.
Use all your tax credits. Claim back anything applicable. Not doing this is throwing away free money.
One person can manage the money, but the other person needs to know the basics (where is it, how much, how to access, what is owed, etc). If you die and manage all the money, would your partner be worse off?
Before you get married do a full financial audit with your partner. Make sure you both know debt, savings, obligations, investments.
Be aware of counter-party risk (your partner and their family).
Hold appropriate insurance. If one of you fell ill or was in an accident, could you support the other?
Be ambitious in the early years. Every 12-24 months in a job, it’s either up or out. If you are planning on making waves you need to keep progressing. If you haven’t been promoted or progressed in your role internally, move somewhere to be challenged and advance.
Make your intentions known. “I want a promotion, pay rise, title. What do I need to do?”
Always be passively looking for jobs.
Improve your career at least every 2 years. You are stagnating if you haven’t: done a course, taken on a new project, joined a new professional network, got a promotion, learned a new skill, developed some performance improvements.
When to move jobs: more income, more desire (interesting role or promotion), shorter commute.
Income is not everything, but if in doubt, chase income.
Make a will when you reach 20k in assets.
Don’t live poor to give your kids an inheritance. They will appreciate if you live happier (unless they’re terrible).
Get an external advisor. This is someone to run decisions by as a sounding board. Doesn’t have to be professional, can be a friend, family member. Go to someone you trust or admire and ask their opinion, people love that. Professionals like financial planners, lawyers, and accountants can also be helpful as they have expertise, experience and are not emotionally attached.
Have 2 bank accounts in separate banks. If there is a tech glitch you still have funds accessible.
Be aware of counter-party risk. If you are the guarantor of a loan, you might have to pay the loan if the borrower defaults. If you have a business partnership you have full responsibility to pay back any loans, not just your share.
Have a plan A and B that are complementary. Plan A is your stretch goal that is not as easily achieved but will lead to huge success. Plan B is the highly likely, slow gradually improving journey down the well-worn path. Plan B is your default. Plan B is a successful and content life, and through careful planning is your worst-case scenario. Plan A should complement Plan B. If Plan A fails, you are left in a good position to go back into Plan B.
H.A.L.T. Don’t make big financial decisions when Hungry, Angry, Lonely, or Tired.
Want to take some of the stress from financial decisions? Create your own Financial Rules of Thumb in line with your goals and current financial status.
Financial literacy leads to reduced stress, better decision making and the ability to plan to meet your personal goals.
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