Recent studies show that while the overall financial situation for most Americans has improved over the last three years, savings rates have not. Whether it’s due to procrastination, lack of professional advice, or not knowing how much to save versus spend, the fact remains that a majority of Americans aren’t prepared financially for a rainy day – or for retirement. Bob Wamhoff, President of Wamhoff Financial Planning & Accounting Services, provides the following rules of thumb for your finances.
1. How much debt should you have?
• Debt should not exceed 36% of your gross monthly income
• This includes your mortgage, car payments, and any other payments you are expected to make on a monthly basis.
2. How much home should you buy?
• No more than 3 times your annual income
• Keep in mind your overall debt so that you don’t exceed 36% of your gross monthly income.
3. Should you buy a car, and how long should you plan to drive it?
• If you purchase a new car, plan to drive it for ten years.
• If you purchase a used car, you can plan to drive it fewer than ten years – typically up to its ten year old mark.
• Again, be sure to calculate what that car payment will do to your 36% debt rule.
4. How much should you save?
• Save at least 10% of your monthly income.
• Be sure you have an emergency fund with at least 3-6 months of expenses.
5. How much money will you need at retirement?
• You will need to save enough so that you have 75% of your pre-retirement income on an annual basis
6. How much life insurance should I have?
• Your life insurance policies should value eight to ten times your yearly income.
• Therefore, if you make $50,000 per year, you should have coverage for $400,000 to $500,000
These are guidelines that will help you start planning, but keep in mind that everyone’s financial situation is different. A professional can look at your income, debt, and savings needs and create a plan to help get you ready for a rainy day – and for retirement.