Your finances deserve more than a rule of thumb.

Rules of thumb can be helpful when you don’t really have a clue where to start. Other than that, they’re pretty bleak. Everyone’s scenario will look entirely different. Does it make sense for everyone to be following the same rules of thumb? Probably not.

Let’s start with cash reserve. Generally, people say that 3-6 months’ worth of expenses held as cash is sufficient. Is it really though? 3-6 months’ sounds great to me if you’re a single high-earner with a stable job. What if you’re married with 3 kids, your spouse watches after them and you own a small business? Personally, I wouldn’t feel comfortable with such a small margin of safety.

Life insurance is next.

Here’s Forbes’ take on a few methods for calculating life insurance. Just an arbitrary number multiplied by your income should do it, right? Negative. We use software to accurately calculate exactly what each client needs.

According to this, a 25-year-old with no dependents earning $100,000 needs $1,000,000 in coverage. Or maybe $500,000…? Give me a break.

Here’s what we think about when it comes to life insurance: total household income, debt, mortgage payments, lifestyle expenses, children, education expenses, and current asset base. 

To slap a random multiplier on your earnings and call that a rule of thumb is just ridiculous.

My favorite (and by favorite, I mean least favorite) is “Pay yourself first.” That is all good and dandy, we love it when people pay themselves first. It is an amazing way to automate savings.

The only question is, where do you start? Try living off X amount of dollars each month? Maybe start strictly budgeting and bring yourself endless angst when you open your wallet?

Don’t worry, I covered one of my favorite budgeting methods in this piece here.

As it pertains to young professionals, it is just not helpful at all to blurt out, “pay yourself first.” Like yeah, duh, where do I start? How do I identify what can reasonably be saved each month?

Next, we can talk about how much you should have saved for retirement. I cannot stand when articles come out stating you should have x amount of dollars earmarked for retirement. This is absolute garbage. Your retirement savings are dependent on so many factors, some completely out of your control.

There is no magic number that applies to everyone. When we run retirement scenarios for clients, we take into account a plethora of variables: Social Security Income, current assets, liabilities, current savings, projected savings, age at retirement, age at death, costs of living during retirement, rates of return, inflation, tax rates during retirement, tax rates today, etc.

The list goes on and on. Slapping a number on your retirement goal with nothing to back it mathematically is absolutely useless.

Also, everyone’s path looks entirely different. Are you going to tell the future brain surgeon who’s riddled with student loans how much they should have saved by the time they’re 30?

They’re likely far off from that number, but when they are 40 or 50, they’ll likely be hitting their peak earning years and have the ability to save far beyond what they could as they worked to master their craft.

It is almost as if personal finance is personal. Riveting. I know it may seem obvious, but tons of rules of thumb are just too general. Everyone’s path will look different, if a rule of thumb doesn’t apply to you, throw it away. There is no need to let generalized advice dictate your financial life.

Sidenote, since you’re already here. What worked for your parents, family, or friends, may not work for you. Nor does it have to. Take everyone’s advice with a grain of salt. No one is in the exact same situation as you.

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Have a more specific question or want to get your finances in order? Feel free to reach out to [email protected] for a free consultation!