Happy Labor Day!
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I’ve seen some interesting opinions on different rules of thumb for saving and financial management and I wanted to share a few from my perspective. It’s important to have discipline when you’re trying to achieve financial goals. Writing down a plan, establishing a system and sticking to it for a certain amount of time (usually at least a month) creates a habit and makes it easier to maintain. And that first rule of thumb applies to just about any scenario.
This is common sense but saving at least 10% of your income in an account that you do not touch or withdraw from is a must. The hard part is actually committing to doing it. Once it becomes a habit you will start seeing the benefits and it encourages you to continue saving. This was one of many important financial lessons my mom taught me and it is being passed down as we speak.
Having a good rainy day fund is so important to wealth building! Living paycheck-to-paycheck is a sure-fire way to making the same mistakes of so many others. You should strive to save at least six months of living expenses in case there is an emergency, layoff or other unfortunate event. Remember, when you fail to plan you’re planning to fail! It’s usually not a question of if but when emergencies occur, preparing yourself will sustain you in so many ways and prevent you from digging a hole that is extremely hard to overcome.
As you are saving in your 401k or comparable retirement savings plan you should have at least 3x your annual salary saved by your mid 40’s. By your mid 50’s, 5-6x your annual salary saved should be sufficient. To accomplish these goals you would generally need to have started in your 20’s. Many people don’t begin saving until later in life and it’s ok, you just have to save aggressively and max out your annual contributions. The bulk of your money should be in stock funds which have proven to give more long-term growth than what I call the sloooww money bonds. Bonds are what people add in more to their portfolio as they get older. You should plan on spending about 80% of whatever your annual income was and even more in your first few years. Obviously, the earlier you decide to draw Social Security, the more personal savings you will need. Building your retirement plan solely on Social Security is not a wise strategy as it may or may not be around in its entirety as we age.
Finally, when buying your home you should spend anywhere between 2.5-4x of your annual income. For example, if you make $75K a year your house loan should be NO MORE than $300K. The smaller the home loan, the bigger the amount of equity you have, the better your chances of being able to keep your home lol. The goal should be to pay off the mortgage (preferably a 15-yr loan) as quickly as possible and not refinancing every 5 years. As interest rates continue to rise home affordability may skew more toward the lower side of that range. One reason the housing collapse was so devastating is because so many people were sucked into predatory lending programs and getting in way over their head. You never want to buy more house than you can afford and room should always be left in your budget for repairs and unexpected emergencies.
The S&P 500 ended this week at 2476, up about 2% from my last blog on July 4th and is near all-time highs. Outside of a North Korean missile test here and there and back-and-forth Presidential smack talking, the market has been quiet. Many of the big fund managers are on vacation and trading volume is light especially at the end of summer which can keep us in a trading range.
September is usually the worst performing month of the year and there is the potential for a pull-back. It has been over a year since we’ve even gotten a 5% pull-back and with the escalating tensions between the US and North Korea, that could be the catalyst to make it happen. Based on history, chances are much higher that we get that 5% or more before the end of the year. Devoid any other black swan events, the continued discussion on corporate tax cuts should keep the major indexes on track of closing on a high note by end of year.
The above chart is the S&P 500’s performance over the last year. Is your bank account moving higher like this?? Please visit our website at www.LegacyInvesting.net and contact us today for a FREE consultation on becoming financially fit and learning how to make money investing in the financial markets. You can make money in ANY type of market (bull or bear). When we meet I’ll give you more information about our services and find out what your financial goals are. If I can help you, we can move forward; if not, no problem but I’m always just a phone call away from any questions or quick advice you want. Get your finances in shape this year! Let’s connect and build generational wealth together. Enjoy your holiday and have a prosperous week ahead!
Disclaimer – Legacy Investing & Wealth Management LLC or any of its advisers are not liable in any way for any losses incurred through trading by readers of this weekly blog. Any information or strategies of trading suggested here involve risk of capital loss and this weekly blog is not considered investment advice. Individuals who invest in securities are solely and completely responsible for any and every outcome that may occur.