Some Personal Finance Rules

Author: Ian De Lange CA(SA) | Chief Investment Officer | Seed Investments

Investing success starts with building savings, and savings requires keeping expenses lower than income. On a personal level this simply means budgeting and managing debt and expenses to accumulate and grow your savings.

Use what is known as the 50/30/20 rule for budgeting. This rule suggests spending a maximum of 50% of disposable income on essential expenses, up to 30% on discretionary spending, and the remaining 20% for saving/investing.

Establish a 3-month emergency savings fund as quickly as possible and ideally aim to increase this to cover 6 months or more of your monthly essential expenses. A larger emergency fund provides a safety net, it reduces stress and allows for greater investment flexibility.

The pay yourself first rule emphasizes automatic monthly savings. By prioritizing saving before other expenses, there are fewer chances to dip into the 20% allocation to savings/investments.

The matching rule relates to employers matching employee contributions to retirement funds up to a certain limit. Taking advantage of this benefit maximises return on savings and should be utilised wherever available.

Use the rule of 72 to determine how many years it will take for your portfolio to double. Divide 72 by the growth rate of your portfolio to get an approximate time frame. For example, if your portfolio grows at 7% it will double in around 10 years, while a growth rate of 15% would result in a doubling time of just under 5 years.

The 4% drawdown rule is a simple way to calculate the sustainability of your total savings during retirement. For example, if your total portfolio approximates $2 million, you can safely withdraw up to $80 000 per annum. There are no guarantees because this rule assumes “normal” returns and levels of inflation.

Here is a good one – focus less on retirement and rather on financial independence by using the rule of 25 which is the inverse of the 4% drawdown rule. Multiply your expenses by 25 to estimate the total savings and investments required for financial independence.

These rules are meant as general guidelines and individual circumstances will always vary, but successful investing first needs good personal finance “hygiene.”


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