“It’s not how much money you make, but how much money you keep, how hard It works for you, and how many generations you keep it for.”- Robert Kiyosaki
With the rising cost of living, more and more Filipinos are finding it extra difficult to maneuver through their financial lives and achieve financial security. In a recent study, only 26% of the surveyed Philippines households said that they set aside money for savings. Many are not confident about their ability to manage their daily living expenses, much more, to save for their retirement or an emergency fund. Not all because they have no money to save but some just lack proper financial guidance.
Having some money-related benchmarks can prove to be helpful. While they do not offer full-proof guarantee, they tend to simplify some rather complex and complicated financial concepts, which can move people to take action.
Here are some smart financial rules that I have learned and used in my own financial journey.
The 50/30/20 Rule – is the classic budgeting formula which suggests allocating 50% of your income for NEEDS like food, rent, or utilities; 30% for WANTS like travel, entertainment or fashion; and 20% for SAVINGS like emergency or retirement fund. But considering the higher cost of living, the formula may be adjusted to 60/20/20, allocating 60% for necessities and the 40% split to wants and savings. Whichever, this ensures that both your today and tomorrow requirements are covered and provided for.
The 3x-6x emergency Rule – recommends to save three to six months’ worth of living expenses to cover emergency and unexpected expenses. This is your financial back up and should only be used for emergencies like medical bills, job loss or accidental repairs. As most experienced during the pandemic, without adequate emergency funds, events like that can put you in a deep financial crises.
The 5x-10x insurance rule – suggests to have a life insurance coverage that is equal to 5 to 10 times your gross salary to provide financial protection to your family in case you are taken out of the picture. The range may vary depending on your actual personal circumstances like having an outstanding loan or mortgage you want paid off or ensuring your children’s education, in the event of your untimely demise. What will be the financial impact of death in your family, especially that of a breadwinner? This range can be a good jump-off point.
The 25x retirement rule – is about saving and having at least 25 times the annual amount you intend to spend during retirement even before you retire. First, determine your retirement spending (75%-80%of your current annual spending), then subtract your pension and other passive income, then multiply the remainder by 25 times to arrive at the required retirement fund. The 25 rule assumes that you will retire at age 60, live 30 retirement years, your retirement fund is invested (in low yield-low risk instrument) and a 4% annual withdrawal rate during retirement. If you have different assumptions about your retirement, like early retirement or a lavish retirement lifestyle, you can adjust the formula to reflect such considerations.
The 4% Withdrawal Rule – suggests that as retirees you should only withdraw no more than 4% of your retirement account balance each year to avoid the risk of outliving your retirement funds. This assumes that the fund is earning at least 6% annual investment yield. Again, this can be a starting point as other factors should be considered such as inflation rate, retirement age, life expectancy and investment yield. An even lower withdrawal rate may be more appropriate to ensure retirement savings last longer.
The Rule of 72 – estimates the length of time it will take an investment with a fixed annual interest rate to double in value. Simply divide 72 by the rate of return you expect to receive. For instance, it will take 14.4 years for an investment with 5% annual interest to double its value (72/5). Bu then again, this is merely a guide as one cannot expect a consistent annual investment return. Time is still your best ally when it comes to investment. The longer you are in the market, the better your chances.
The “Age in Bonds” Rule – is about matching the percentage of bonds in your investment portfolio to your age. If you’re age 30, have at least 30% of your investments in bonds. The objective is to decrease your portfolio’s risk level as you near retirement, as bonds are considered low risk instruments. However, considering your financial goals and risk tolerance, you can assume a different investment mix that can provide both security and better growth.
I used most of the above financial rules as guidelines for my own my financial strategy. Adjustments were made along the way to reflect my changing personal requirements and circumstances. I have proven them to be effective.
Talk to a financial advisor who can guide you make your own financial rules and formula to best fit your personal needs. Whether it’s creating your budget, determining your insurance coverage or retirement fund, these professionals are available to help you make a sense of it all.
But let the Holy Week reminds us that above all these financial rules, it’s God’s rules that matter the most. Have a Blessed one!
