The Personal Finance Podcast
15 Personal Finance Rules That Will Keep You Wealthy!
Mon Jul 17 2023Description
The episode covers a range of personal finance topics including life insurance, asset allocation, savings rates, home buying, emergency funds, retirement withdrawal, and real estate investing. It provides rules of thumb and guidelines to help listeners preserve wealth, become financially independent, and retire early.
Insights
Life Insurance
Life insurance coverage of around eight to ten times your annual income is recommended. Life insurance is unnecessary if you have no dependents or people relying on your income.
Savings Rate
Aim for a savings rate of 20% or more to achieve financial independence. Savings rate includes money invested and put into an emergency fund.
Home Buying
For home buying, aim for a 20% down payment, spend no more than 30% of income on monthly payments, and limit the purchase price to no more than 3x your income. First-time homebuyers may have difficulty saving up a 20% down payment, but can reduce it as long as monthly payments are less than 30% of income.
Emergency Funds
Save at least three months' worth of expenses before starting to invest. Target having six months' worth of emergency funds funded. Having six months of emergency funds is important, especially as you approach retirement age. Cash is safety and can help protect your wealth.
Retirement Withdrawal
Use the 4% rule withdrawal for retirement to determine how much money you need in retirement based on your investments. $1 million in assets allows for a $40,000 annual withdrawal (4%). Adjust the withdrawal amount each year based on inflation.
Real Estate Investing
The rule of thumb for real estate investing is the 1% rule, where a property should rent for at least 1% of its value per month. For rental property expenses, a rough estimate is that they will be around 50% of rents without considering the mortgage.
Chapters
- Policy Genius and Chimes Online Checking
- Personal Finance Rules
- Asset Allocation and Life Insurance
- Life Insurance and Savings Rate
- Shopify and Factor
- Home Buying and Emergency Funds
- Emergency Funds and Retirement Withdrawal
- Retirement Savings and Real Estate Investing
- Real Estate Investing Considerations
Policy Genius and Chimes Online Checking
00:00 - 06:41
- Policy Genius offers easy comparison of life insurance quotes from top insurers. Life insurance policies start at $25 per month for $1 million coverage. Some options offer coverage in as little as a week without medical exams. Policy Genius has licensed agents who work for you, not the insurance companies. No added fees and personal details are private.
- Chimes Online Checking account offers perks like fee-free overdrafts and early direct deposit. Pay friends through Chimes regardless of their bank account and cash out fee-free.
Personal Finance Rules
00:00 - 06:41
- 15 Personal Finance Rules discussed in the podcast episode. Rules of thumb provided for buying cars, buying houses, retirement savings, asset allocation, and real estate. The goal is to help listeners preserve wealth, become financially independent, and retire early.
Asset Allocation and Life Insurance
06:17 - 12:19
- Asset allocation into stocks is recommended for those with a high risk tolerance and understanding of the stock market's long-term performance. A rule of thumb for asset allocation is to subtract 25 from your age to determine the percentage of stocks in your portfolio. The Warren Buffett portfolio suggests having 90% stocks and 10% bonds at age 35, 75% stocks and 25% bonds at age 50, and 65% stocks and 35% bonds at age 60.
- Life insurance coverage of around eight to ten times your annual income is recommended, with flexibility depending on individual circumstances. Life insurance is unnecessary if you have no dependents or people relying on your income.
Life Insurance and Savings Rate
11:49 - 17:51
- 10 times your income for life insurance is a good rule of thumb. Life insurance is not necessary if you have no one depending on your income. If you have dependents, you should have life insurance, even if you're not the breadwinner. Term life insurance is recommended for most people as it's cheaper and covers a specific time period.
- Aim for a savings rate of 20% or more to achieve financial independence. Savings rate includes money invested and put into an emergency fund. 401k match can be added to your savings rate if desired.
Shopify and Factor
17:27 - 23:34
- Shopify powers entrepreneurs across 170 countries. Factor delivers ready-to-eat meals with high nutritional value.
Home Buying and Emergency Funds
23:08 - 29:06
- To retire in 10 years or less, keep the purchase price of a car below 10% of your gross income. Luxury vehicles should be paid off in two years or less. For home buying, aim for a 20% down payment, spend no more than 30% of income on monthly payments, and limit the purchase price to no more than 3x your income. First-time homebuyers may have difficulty saving up a 20% down payment, but can reduce it as long as monthly payments are less than 30% of income. Houses are not good assets and historically return about 4%. Buying an $850,000 home with only $100,000 in cash saved is risky. Keep housing costs closer to three times your income and within the range of 30% or less of your income. If necessary due to high prices, you can increase the purchase price to four or five times your income while still keeping payments under 30%.
- Save at least three months' worth of expenses before starting to invest. Target having six months' worth of emergency funds funded.
Emergency Funds and Retirement Withdrawal
28:48 - 34:46
- Having six months of emergency funds is important, especially as you approach retirement age. Cash is safety and can help protect your wealth.
- The 50/30/20 rule for budgeting has pros and cons. If you have debt, reduce discretionary spending and increase savings and investing.
- Keep expense ratios for mutual funds and index funds below 0.3% to avoid fees that can eat away at your portfolio over time. The difference in fees, even between 0.10% and 0.25%, can still impact your wealth building potential. Consider Fidelity or Vanguard for low-fee options.
- Use the 4% rule withdrawal for retirement to determine how much money you need in retirement based on your investments. $1 million in assets allows for a $40,000 annual withdrawal (4%). Adjust the withdrawal amount each year based on inflation.
Retirement Savings and Real Estate Investing
34:31 - 40:17
- The 4% rule is a popular guideline for retirement savings, where you withdraw 4% of your initial investment each year and adjust for inflation. Some literature suggests that the 4% rule may be too conservative, with models showing that you can withdraw as high as 5.5%. The benchmark for financial independence is having 25 times your annual income saved up.
- To estimate how long it takes for your money to double based on interest rate, use the rule of 72 by dividing 72 by the annual interest rate.
- The rule of thumb for real estate investing is the 1% rule, where a property should rent for at least 1% of its value per month. For rental property expenses, a rough estimate is that they will be around 50% of rents without considering the mortgage.
Real Estate Investing Considerations
39:52 - 42:32
- The condition of the property and the behavior of tenants can greatly impact expenses in real estate investing. Having tenants who treat the property well can result in lower expenses.
- A rate of return greater than 8% is desirable in real estate investing. If a rate of return below 8% can be achieved through other investments with less effort, it may not be worth pursuing a real estate investment with similar returns.
- The 1% rule, where monthly rent should be at least 1% of the purchase price, is a useful guideline for evaluating potential real estate investments. Expenses should ideally be around 50% of rental income in real estate investing. Properties with a cap rate above 8% are more attractive for investment, unless they are located in an up-and-coming area that is expected to appreciate significantly.