Seven Financial Guidelines and Shortcuts With Numbers

 

I recently taught a new class about common financial planning guidelines that include numbers. I started the class by noting that a guideline is a recommended principle, course of action, or piece of advice. Unlike rules and laws, which are mandatory, guidelines are not action steps. Instead, people follow them voluntarily to guide their daily actions and decisions.

 

Interestingly, however, many personal finance guidelines do use the word “rule.” Examples include the 4% Rule and the Rule of 72. Once again, they are not rules, as in required actions, but, rather, suggested calculations. Some financial guidelines involve ratios which are derived from combinations of numbers.

 

Below are seven examples of ten financial guidelines with numbers:

 

20/4/10 Rule- This is a guideline for car loans. It suggests making a 20% down payment (e.g., $10,000 for a $50,000 new car), financing the car loan for no more than four years, and keeping monthly expenses under 10% of gross income (e.g., $5,000 with a $50,000 income).

 

50/30/20 Rule- This is used as a guideline for household budgeting. It suggests spending 50% of household income on needs, 30% for wants, and 20% for savings and debt repayments. For example, with a $50,000 annual income, $25,000, $15,000, and $10,000, respectively.

 

Consumer Debt-to-Income (DTI) Ratio- Suggests that all monthly debt payments (excluding a mortgage) should not exceed 15% of net (take-home) pay and a 20% DTI ratio is considered a “danger zone.”  For example, the ratio for monthly debt of $600 and $4,500 net income is 13.3%.

 

Rule of 25- A common retirement savings target is 25 times your desired retirement spending (not covered by guaranteed income like Social Security and a pension) by the time that you retire. Example: if you need $60,000 per year, 25 x $60,000 = $1,500,000

 

Rule of 72- This is a shortcut to estimate how long it takes to double a sum of money at a certain interest rate, Simply divide the interest rate into 72. For example, with 6% interest, it takes 12 years (72 ÷ 6) to double your money.

 

Three Fund Rule- This is a simple guideline to build a low-cost, globally diversified, investment portfolio with just three mutual funds: a U.S. total stock market index fund, an international stock index fund, and a U.S. total bond index fund.

 

Three to Six Rule- Setting aside enough savings to cover three to six months of essential living expenses (e.g., housing, food, utilities, insurance, transportation, and debt repayments). If this is not possible, save what you can. Any emergency fund savings is better than none!

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

 

 

Health and Wealth Connections

 

Health and wealth are both important resources for living a happy and successful life.  People in poor health often die young and spend thousands of dollars (that could have been invested) on health care costs.  On the other hand, those who practice recommended health behaviors are more likely to exceed average life expectancy and need a large nest egg to insure that they don’t outlive their assets.

From my book, Small Steps to Health and Wealth, below are ways that health and wealth are related:

¨   Problems Generally Start Small- Weight problems usually develop gradually, such as gaining 3 to 4 pounds a year due to increasingly sedentary lifestyles and larger food portion sizes.  A comparable financial example is “perma-debt” (i.e., a permanent debt balance on credit cards) and increasingly higher interest and/or fees as outstanding balances rise. 

 

¨   Less Stigma Than Before- With many Americans having “weight issues” and almost 500,000 non-business bankruptcies filed in 2024, health and financial problems have gone “mainstream” and are more tolerated, if not accepted, by society.  When many people are doing the same thing or have the same characteristics, it is hard to view them as “abnormal.”

 

¨   Impacts on Job Productivity and Discrimination- Overweight and unhealthy people often have a difficult time getting hired and some may have difficulty performing the duties associated with their job. Similarly, personal finance problems also affect job performance.  One widely quoted study estimated that 15% of workers have financial problems (e.g., high credit card debt) that negatively impact their job productivity.

 

¨   Lots of Technical Jargon- Both the health and medical fields have jargon and acronyms. Think BMI (body mass index) and LDL cholesterol and REIT (real estate investment trust) and NAV (net asset value, a term used with mutual funds). Worse yet, personal finance and health information sometimes contains contradictory “expert” opinions or research results, making it very difficult for consumers to know how to interpret and use conflicting findings.

 

¨   Fear of Drastic Changes- Many people believe they must make major lifestyle changes to be healthy and wealthy.  So, instead, they “freeze” and do nothing. In reality, every small step makes a difference whether it is increasing physical activity, eating healthy snacks, or saving 1% or more of your salary for retirement. The trick is to get started today.

 

¨   Restrictions Help Avoid Problems- Some people find it helpful to lose weight by eating portion-controlled foods (e.g., convenience food entrees and nutritional diet drinks) that contain nutrition labels and calorie counts.  An example of a financial restriction is having tax-deferred retirement plan savings automatically deducted from your pay.

 

¨   The Longevity Connection-  People who practice healthy behaviors, such as not smoking, exercising regularly, and eating at least five fruit and vegetable servings daily, decrease their risk of dying prematurely.  They also need to accumulate adequate wealth so they don’t outlive their assets.  Stated another way, the “price” of better health is the need for increased wealth. 

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

My Key Takeaways from #AFCPE2025

I recently attended the 2025 Association for Financial Planning and Counseling Education (AFCPE) Symposium in Glendale, AZ.

Below are nuggets from sessions that I participated in:

 

Financial Health and Capability- There was a sharp decline in 2024 in Americans’ ability to make ends meet. The decrease was mainly driven by middle and upper income households. Not surprisingly, there was an improvement in knowledge about inflation, especially among younger adults. Less than half (46%) of U.S. adults have three months of expenses saved for emergencies.

 

Financial Conversations- Keynote speaker Riaz Meghji noted that “We are one conversation away from a different life.” In other words, interpersonal connections matter. He challenged attendees to recall a defining conversation that changed their life and to remember that if they say “yes” to something that costs money or time, they are also saying “no” to alternative options.

 

Hyperbolic Discounting- This is a cognitive shortcut (bias) where people attach more value to the present than the future, prefer smaller rewards now vs. a larger reward later, and tend to be impulsive. Hyperbolic discounting makes the future “feel cheaper” than it is and can be mitigated with precommitment strategies, goal partitioning, choice architecture, and future self exercises.

 

AI and Tax Preparation- A study of the use of ChatGPT in preparing income taxes was presented. Bottom line: it worked well for a very simple case but provided faulty responses with more complex situations. AI operators must tell AI to evaluate their eligibility for tax deductions and credits. When mistakes are caught and noted in follow-up prompts, AI output gets better.

 

Theory of Planned Behavior- This theory states that, when people have an intention to complete a task, action is more likely to take place. Research findings were presented that showed a positive relationship between attitude toward estate planning and intention to prepare an estate plan. An estimated $84 trillion of wealth is expected to be transferred by 2045.

 

Financial Cost of Dementia- 7.2 million Americans live with Alzheimer’s disease and the lifetime risk at age 45 is 20% of women and 10% of men. Financial mismanagement is an early indicator of cognitive decline (e.g., missed payments, double payments, spending extravagantly). AARP has a “dementia hub” with resources about interacting with people with dementia.

 

Financial Trauma- Financial trauma is any instance, observed or experienced, that has a negative impact on the way someone views, interacts with, or believes about money. Sources include generational influences, poverty, and systemic factors. Trauma is not a personal issue, but a societal one. No one makes bad financial decisions. They do the best that they can in the moment.

 

Grief to Growth- Widowed individuals each grieve in their own way. While there is no timetable for the grieving process, a speaker on a panel suggested grouping follow-up tasks following a death into three categories: Now (e.g., notifying Social Security), Soon (e.g., reviewing financial documents), and Later (e.g., making big decisions like selling assets and moving).

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Take-Aways from a Panel Discussion About Retirement

 

I recently attended a webinar about retirement planning that featured a panel of four retired Cooperative Extension educators who did the same type of community education work that I did when I worked for Rutgers Cooperative Extension in New Jersey.

 

Below are my key take-aways:

 

Retire to Something- Everyone on the panel concurred that it is wise to have a post-career plan before you retire, especially after an impactful and time-intensive career. Whether it is working part time, volunteering, starting a business, traveling, or care-giving, the choice is up to you.

 

Schedule “Me Time”- It is easy to get sucked into too many commitments after leaving a full-time job. Everyone just assumes that “you have the time.” It is important to schedule time for yourself and protect your schedule.

 

Do Retirement Savings Calculations- Several panelists noted that they could have retired sooner than they actually did and advised the audience to put some effort into calculating what you need to save during your working years to have “enough” in later life.

 

Prepare for an Orderly Exit- Clean out paper work files and decide what needs to stay at your workplace or what can be copied or scanned for personal use later. This is especially true if you plan to leverage your skills through a post-retirement encore career or entrepreneurship.

 

Buy a Personal Computer- Several panelists had previously only used a computer that belonged to their employer. They spoke about the importance of buying your own laptop or desktop to transfer important files to. Another way to do transfer files is using an external hard drive.

 

Consider Entrepreneurship- Several panelists started post-retirement businesses for meaning and purpose and structure to their day as well as income. Some also were not covered by Social Security during their primary career and started a business to earn Social Security quarters of coverage or to increase their benefits by replacing “0” or low-earning years with higher earnings.

 

Help Your Successors- Not everyone on the panel had a named replacement for their position when they retired. A few did. Either way, panelists recommended leaving an “orientation” letter and a jump drive with important files for their successor.

 

Use Your Leave Time- Take all your vacation days and a sabbatical, if possible, while you are working. Long stretches of time off will prepare you to be away from the office and test family relationships with an extended period of closeness.

 

Don’t Worry About Being Replaced- Every panelist recommended retiring when the time is right for you. Your employer will continue your work responsibilities…or not. That is not your problem. Don’t work longer than you want just to “save” your program or department.

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.

Effective Debt Solutions

 

I recently attended a webinar titled Safe and Effective Debt Solutions presented by the Foundation for Financial Planning. Below are seven key take-aways:

 

Debt Statistics- In early 2025, Americans collectively owed approximately $1.2 trillion on their credit cards and almost half (48%) of credit card holders had revolving debt, which means they pay interest on their outstanding balance. Credit card interest rates currently average over 20% and it can often take 20+ years to repay outstanding balances with small minimum payments.

 

Avalanche and Snowball Methods- These are popular strategies for paying down debt with additional payments beyond required minimum payment. The avalanche method prioritizes paying off debts with the highest interest rates first, while the snowball method focuses on paying off the smallest debts first, regardless of interest rate. Unfortunately, these two methods are not useful for people with very tight cash flow and no extra income to apply toward outstanding debt.

 

Essential Data- Borrowers with outstanding debt need to assess their financial situation to develop a plan to move forward. This includes compiling a list of secured and unsecured debts and their balances, checking their credit report and score, and making a list of overdue accounts.

 

Consumer Debt-to-Income Ratio- This is another key piece of information that measures the percentage of a person's net (take-home) income used to pay consumer debts, such as credit cards, auto loans, student loans, and personal loans. A lower ratio suggests financial stability, while a higher ratio indicates financial strain. Most lenders prefer this ratio to be below 20%.

 

Confusing Terminology- Many people confuse debt settlement services by for-profit companies with debt management programs (DMPs) by non-profit organizations. DMPs typically plan for a “debt free date” in three to five years and require clients to have positive cash flow and to close or stop using their credit card accounts. An administrative fee is deducted from monthly payments to the sponsoring non-profit organization which are pro-rated among clients’ existing creditors.

 

Due Diligence- Webinar attendees were encouraged to research the reputation of credit counseling agencies that offer DMPs and to choose certified NFCC non-profits. The National Foundation for Credit Counseling (NFCC) is the largest nonprofit network of certified credit counseling agencies in the U.S. and sets industry standards and accredits financial counselors.

 

Debt Consolidation Loans- There are pros and cons. An advantage is the potential for a lower interest rate than, say, the APR charged on credit cards. A risk is that overall debt will increase if people make purchases on credit cards that were paid off with a debt consolidation loan. This quote from the webinar says it all: “You can’t get out of a hole by digging it deeper.”

This post provides general personal finance or consumer decision-making information and does not address all the variables that apply to an individual’s unique situation. It does not endorse specific products or services and should not be construed as legal or financial advice. If professional assistance is required, the services of a competent professional should be sought.