So much of the financial advice we live by has been around for decades—and is rarely questioned. But times they are-a changing. Maybe we need to ask some questions: How much savings do I need? What portion of it should I invest? What about my retirement funds?
Below are some pieces of common financial advice and the modern-day adjustment that you may find is more applicable in today’s world:
1. Old Rule: Keep at least 6 months of savings in the emergency savings fund. The reasoning for this rule was to cover your expenses if you lost a job, had sudden medical expenses, or took some other kind of large, unexpected hit to your finances. 6-months used to be about how long it took for someone to find a new job.
Update: 12-months worth of living expenses should now be stashed away. Especially as you get older, it may take a longer time to find a new job, and this will reduce the risk of needing to withdraw money from other investments you may have, such as your 301K or IRA.
2. Old Rule: Before retirement, put aside 50% of your after-tax income for needs, 30% for wants, and 20% for savings. The reasoning for this ratio is to help you strike a balance between daily essentials, having fun right now, and saving for the future.
Update: More flexibility is needed for most people. Needs generally add up to more than 50% of someone’s spending. It is not easy or realistic for people to have a hard and fast rule on their ratio of spending anymore.
3. Old Rule: Put aside 1% of your home’s value each year for repairs. In the event you need a huge repair—like a roof replacement—you’ll have enough money to cover these large ticket items.
Update: If you have an older home, you may need to put in more than 1%. It is now advised by most financial planners to save 2% of your home’s value.
4. Old Rule: For retirement, plan your expenses to be about 80% of your pre-retirement income. The cost of living goes down once the kids and work-related expenses are gone. Even though you are used to setting aside your income for retirement, that aspect will be gone once you are actually retired.
Update: Pay attention to your expenses—not your income. Your spending may be different than you think after retirement. Retirees may have spikes in some expenses, such as travel or hiring home health aides, etc. Identify your monthly spending and make sure you have enough to cover it.
These are just a few updated rules to common financial advice that you may have heard over the years. Remember, anytime you make financial changes, it’s a good idea to have your estate plan updated, or at least reviewed. Contact attorney Jim Miskell of the Estate Planning Law Group of Georgia. I’m happy to help you determine whether it’s time for a review of your estate plan, and help ensure that your assets are properly protected—no matter the circumstances!