Are You On Financial Track?

It appears (knock on wood) this brutal recession may finally be coming to an end.  As we let out a collective sigh of relief, many people are starting to poke their heads up and ask, “Am I on Financial Track?”  Here are some rough rules of thumb that you can use to benchmark your progress as you move through life’s decades.

IN YOUR 20s: Your key challenge is to learn to live within your means. Steps to take include:  Avoid credit card debt like the plague. Make at least the minimum monthly payments on your students loans, on time, every month. Build a starter emergency fund of at least $2,000, and start contributing your employer 401k/403b.

IN YOUR 30s:  Your key challenge is to build a solid financial foundation. Save for a home down payment – but don’t bite off more house than you can chew. Build that emergency fund up to at least 3 and ideally 6 months of living expenses. If you have children make sure you have term life insurance equal to 10x to 15x your income and a Will naming a guardian.

IN YOUR 40s:  Your key challenge, as you enter into your peak earning years, is to avoid lifestyle creep. If you have not been saving at least 10% of your gross income in your 20s & 30s for your retirement, it’s time to kick it into high gear by committing to save at least 15%. If you have kids and want to help them pay for college, it’s time to open a 529 plan account (if you haven’t already). Resist the urge to splurge, these are your peak earning years… and they should also be your peak saving years.

IN YOUR 50s:  Your key challenge is to resist the temptation to make up for lost time by swinging for the financial fences. Check your asset allocation in your retirement plan – this is the time to start easing up on stocks. “100 minus your age” is good rule of thumb for the maximum percentage of your portfolio to have in stocks at this stage if you are a man. “110 minus your age” is a good rule of thumb if you are woman. Consider long-term care insurance. Make sure your Will & related documents (medical & durable power of attorney) are updated for any life changes since original creation.

IN YOUR 60s & 70s: Your key challenge is to not over-nibble on your nest egg.
Think long and hard about spending more than 4% of your savings annually once you are in retirement. If you have not amassed your desired savings nest egg, it’s time to think about working longer or part-time. Talk to your children about your estate planning wishes.

IN YOUR 80s & beyondEnjoy, you’ve earned it! (and share that hard-won wisdom, it would be an honor to learn from you.)

Are there any additional tips you think should be added to this list?  If so, I’d love to hear…

10 Replies to “Are You On Financial Track?”

  1. Nice article. I agree that buy only what you can afford. This means a full monthly payment (that’s payment, insurance, taxes, and interest – or, your PITI) of no more than 1/3 of your gross monthly income.

  2. these are great rules to live by and check in on occasionally!
    we are expecting our first child, so i looked into term life insurance for the first time and realized i didn’t even know what it was! it is more expensive than i thought it would be. i know that the “term” would vary depending on how many kids you have and your financial situation, but are there any rules of thumb on the term to buy? get a term to cover your children until they are through college? to age 18? as long as you can afford? can you get a shorter term and extend it later (provided you are still around)?

    1. Raj & Jessie – Thx for your kind comments
      Susanne – Ahh, that’s the million dollar question (literally!). Here’s how I think about it – the purpose of life insurance is to help make sure your children are properly taken care of if something happens to one or both of their parents. In an ideal world, you’d take out enough in life insurance to ensure that each of your kids’ living expenses are covered at least through age 18. A “rough” rule of thumb for newborns is to purchase term insurance equivalent to 10x- 15x your household annual income. In the event that one or both parents pass on, that would provide enough income (if properly invested) to help maintain the same standard of living your child would have had pre-tragedy. But of course, that’s ideal. Practically speaking if that’s too expensive for your household budget, you could ratchet it down to say 5x your annual household income with the hopes that you could afford to increase those coverage levels down the road. Another rough rule of thumb would be to split the coverage between both spouses – in other words, if one spouse works outside the home and one works inside the home, the latter also needs coverage because all that hard work the stay at home spouse is doing would have to be outsourced in event of their death. This is a long and involved topic with lots of nuances, but that’s the “short answer.” I’d also suggest price shopping for term insurance using http://www.intelliquote.com – it never ceases to amaze me how wildly premiums can vary from company to company. Additionally, don’t forget to do a Will and name a guardian for your child. You can create a Will inexpensively at http://www.LegalZoom.com. Hope this helps. Most importantly, congratulations on the upcoming addition to your family!

  3. these are great rules to live by and check in on occasionally!
    we are expecting our first child, so i looked into term life insurance for the first time and realized i didn’t even know what it was! it is more expensive than i thought it would be. i know that the “term” would vary depending on how many kids you have and your financial situation, but are there any rules of thumb on the term to buy? get a term to cover your children until they are through college? to age 18? as long as you can afford? can you get a shorter term and extend it later (provided you are still around)?

  4. @CI
    Congratulations!! What an exciting time for you & go you for being so financially responsible so as to look into term life insurance.
    So a “rough” rule of thumb for newborns is to purchase term insurance equivalent to 10x- 15x your household annual income. In the event that one or both parents pass on, that would provide enough income (if properly invested) to help maintain the same standard of living your child would have had pre-tragedy. But of course, that’s ideal. Practically speaking if that’s too expensive for your household budget, you could ratchet it down to say 5x your annual household income with the hopes that you could afford to increase those coverage levels down the road. Another rough rule of thumb would be to split the coverage between both spouses – in other words, if one spouse works outside the home and one works inside the home, the latter also needs coverage because all that hard work the stay at home spouse is doing would have to be outsourced in event of their death. This is a long and involved topic with lots of nuances, but that’s the “short answer.” I’d also suggest price shopping for term insurance using http://www.intelliquote.com – it never ceases to amaze me how wildly premiums can vary from company to company.

  5. Very interesting article. I like to see how one’s view changes as they get older. One of the things my father always says is make the work you do today count towards tomorrow because what you want now is going to change.

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