I’m sure you’ve heard the phrase “It’s a numbers game!” Numbers are a big part of life, just like money is. So, what numbers are important where money is concerned?
3 – 6 months: An emergency fund, when fully funded, should cover 3 to 6 months of fixed and variable living expenses. How big a fund is adequate will vary by individual situations. A single-income household should have a larger fund (6 months) while a two-income household may have more flexibility and require a smaller fund (3 months).
The money should be kept in a liquid or easily accessible form: cash in a bank account or a money fund. Long-term investments can also be considered if warranted. But, the point of having a liquid emergency fund is to prevent impacting long-term financial goals and objectives if at all possible.
36%, 28%, 20%: Personal debt ratios are important for financial stability. Some rules of thumb say:
– total monthly debt should not exceed 36% of gross income
– housing costs (mortgage, taxes, insurance) should not exceed 28% of gross income
– consumer debt should not exceed 20% of net income
In these perilous economic times it might be prudent to make all of those percentages apply to net (after tax) income. Regardless, I recommend a conservative approach so staying safely below, rather than right at, those percentages would be the prudent thing to do.
5 – 10 times: How much life insurance is in place? The general suggestion is 5 – 10 times the salary of the person whose income is to be replaced (typically the primary breadwinner’s salary). However, the proper approach is to determine the actual needs (living expenses, mortgage, education expenses, retirement) to be met or provided for and put the appropriate amount of insurance in place. There should be some amount of life insurance on both spouses.
60%: Disability insurance is designed to provide income replacement when a short- or long-term illness prevents someone from earning their normal income. It is not full income replacement, however, but about 60% of full salary. Some employers make disability insurance available as a benefit. In many cases the benefit is not portable with job change or job loss. Therefore, it is prudent to have a personal disability policy even if an employee benefit is also in place.
5% – 10%: Savings is important. The recommended saving rate is 5 – 10% of gross income. The ability to save at that rate will depend on a number of factors such as income, spending habits and other cash outflow. Ultimately, it may come down to priorities: what importance is given to saving versus spending or short-term versus long-term.
25: As in December 25, Jesus’ birthday. Whether you believe it to be the traditional or historical date of His birth, it is about a gift. Some people brought gifts to Jesus, but He IS a gift, and a free gift at that. A gift has to be accepted, it can’t be forced on you. So there is a free gift out there for you this season if you would accept it.
I wish you and yours a “Merry Christmas” and a “Halcyon new year!”