Making Dollars Out Of Sense: Examining Financial “Tricks” and “Treats”

Ben Haas

It’s October and that tends to mean candy consumption will be on the rise again.

I look forward to Halloween and participating in Kutztown’s Main Street Trick or Treat Night on October 23rd from 6-8pm as children will travel from business to business with the question “trick or treat”. It’s innocent fun for both the children and vendors. There is simply one rule of thumb – provide a treat, or risk there being a “trick” performed (a usually idle threat to perform mischief if no treat is given).

This rule of thumb and trick and treating got me thinking about “tricks” and “treats” of financial ‘rules of thumb’. Whether pertaining to how much to invest for your goals, how much life insurance to have, and even how much you should be paying in taxes—the rules seem a little more convoluted than just “trick or treat”. “Why,” you ask as you prepare your costume, “does money management have to be so complicated? Aren’t there some simple financial ‘rules of thumb’ to unwrap with all this chocolate?”

YES! There are financial ‘rules of thumb’ that can provide useful direction. These ‘rules’ may not ensure a worry-free retirement, a successful business opening, or that the kids’/grandkids’ education will be paid for. But given that many Americans are “all thumbs” at money management, these general rules seem to be a great start. By the same token, there are other rules of thumb that, in my opinion, have too many exceptions to be very helpful.

So in the spirit of Halloween, let me walk you through which ones to follow. Here are my “TRICKS” and “TREATS” evaluations of the most common financial ‘rules of thumb.’

Rule #1: You’ll need 80 percent of your earnings for annual expenses in retirement. TRICK! I hear this one all the time. But think about your (pending) retirement. What does it look like? Most of my clients travel, do projects around the house, spoil their grandkids. They are active, physically and financially. They often spend more than when they were working. Add in a rise in medical costs, and reduction in benefits, and even more may be needed. I encourage my clients to do a bottom-up, rather than top-down, analysis of your actual retirement expenses.

Rule #2: Your total debt should be 36 percent or less of your gross income. TREAT! This is an “affordability” rule often used by banks to determine how much of a mortgage—and thus how much house—you can get. It also takes into account the fact that two people with the same income can look very different financially, depending on their liabilities.

Rule #3: Subtract your age from 100 to get the percentage of stocks you should hold in your portfolio. The rest should be in fixed income. TRICK! Generalizations on investing can be very dangerous. All individuals have different circumstances, regardless of similarities in age. Your portfolio allocation needs, at very least, to also take into account the size of the portfolio and sources of income outside of savings. An 80-year-old millionaire probably does not need to hold 80 percent in low risk bonds, when those assets will likely never be used by him, but rather by his younger heirs. Those who have ample retirement pensions may also be exempt from this rule, even if their portfolios are far more modest.

Rule #4: A good plan for retirement is to have 7 to 10 years of basic/essential living expenses always available in cash, short-term bonds and/or guaranteed income. TREAT! Market volatility can be emotional. This rules ensures an investor adequate liquidity to get through a down period in the financial markets, without having to sell stock holdings at losses. It also gets to the heart of the retirement issue: namely that retirement success depends on the level of your living expenses.

Rule #5: Financial success requires living within your means. DOUBLE TREAT!!! I believe this is the golden rule of personal finance. When I meet an individual for the first time, I can almost instantly know if they will be able to reach their goals. If you consume less than you make, it’s almost a sure thing that you will be financially secure, regardless of your level of income or size of your portfolio.

Now for that candy corn, please? TREAT!

Benjamin N. Haas, CFP®, CRPC®, US Wealth Management. 158 West Main Street, Kutztown, PA 19530. Securities offered through LPL Financial. Member FINRA/SIPC. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.