FX.co ★ 7 Simple Rules of the Model Budget
7 Simple Rules of the Model Budget
Budgeting Ratio = 20:30:50
Successful cost planning says: 20% should be immediately saved or put towards paying down debt, 30% should be the maximum you spend on housing, and 50% should be spent on everything else. Such a proportional expenditure of funds in most cases allows achieving the set goals. Savings will become the basis of your financial well-being, thirty percent on housing creates a good anchor for how much you should pay, while all other essential needs will be fully satisfied.
Emergency Fund Ratio = 6X Monthly Expenses
Emergency fund should have enough money in the event of an unforeseen situation the duration of which experts estimate from 3 to 12 months. The amount of savings "for a rainy day" also has the expression: initially it should be 6 times higher than your average monthly expenses. As they grow, cash savings can be sent to a bank account, so that interest on them will become an additional income. Six months is a good target and gets you on the path of saving. The creation of a reserve fund is a direct way to a long-term strategy of savings increment. In addition, this is a kind of "airbag" in case of loss of work or in any other unforeseen situation.
Mortgage Ratio = 2.5X Your Income
It is well known that when a client applies to a bank the amount of a mortgage loan and regular contributions are calculated on the basis of a formula. It equals your annual income multiplied by a rate of 2.5. As a rule, this ratio fits within 25-30% of your monthly income.
Investing Ratio = 120 Minus Your Age
When you are building your investment portfolio, asset allocation can be a tricky problem to solve. The percentage of your assets in equities should be 120 minus your age and the percentage of bonds depends on this indicator. As you age, the allocation will shift from equities to bonds. Once you're invested, you can start thinking about more complicated diversification issues.
Retirement Savings Ratio = 25X Your Current Income
Experts believe that a safe withdrawal rate in retirement is 4% of your assets. When you reach the amount, 25 times higher than your current annual income, your retirement funds will last as long as you do. This is a very conservative ratio because it does not take into account the possibility of incomes exceeding over expenditures and not estimating the real amount of pension expenditures, but it has the right to exist as it has proved its viability.
Net Worth Ratio = Age X Pretax Income / 10
Another rule of thumb, no less important than investment and retirement, concerns estimating the required level of well-being with the help of age. It is necessary to multiply the age by income before taxation and the resulting number should be divided by 10. This rather tricky technique allows you to track how capital grows, and at the same time makes you think about long-term financial well-being.
Life Insurance Ratio = 10X Your Annual Salary
A ratio for life insurance can be difficult because there are so many life situations. In general, it is considered that the amount of insurance coverage should be 10 times higher than the annual income and will be higher for those who have underage children. Obviously, the problem of income replacement does not cease to be a cornerstone in the formation and calculation of insurance payments, especially if insurance companies assume your spouse will be working and supplement the remainder.
