The 25% Rule!
Worby Wealth Management a Trusted Regina Financial Advisor talks about Household Finances.
The truth is that financial management is boring. I mean, it sounds interesting when you watch movies and they’re yelling, “Buy, Buy! Sell, sell!” But this behavior does not make you rich – in fact, it can have the opposite effect.
Smart people understand one thing – tactics do not win the battle, logistics do. And one of my best pieces of advice is the 25% rule.
It essentially breaks down like this: If you want to attain financial security contribute 25% of your net monthly income towards your net worth. It is very important that financial security has very little to do with being ‘rich’ but everything to do with having the resources available to have options throughout your life.
A few notes about each. Paying down credit cards does not fit into the asset/liability description above. Credit cards are consumption. If you have already made errors and are carrying balances, then you need a plan to pay them down and it can be worked into a liability repayment plan. However, further credit card debt becomes consumption rather than a liability.
Big expenses – trips, renovations, etc. should be paid for with funds that have been saved in advance; they should not be financed. The reasons are many:
First, once you start down the ‘financing fun’ road, it can be hard to maintain discipline.
Second, a trip paid for and fully funded is less stressful.
Third, something you pay for as you go you tends to be better planned out and fits your budget – and studies show that planning your spending is almost as fun as the actual spending.
Building assets is then the ‘exciting’ part, right? “Buy, buy, sell, sell” and all that. Actually, it is very hard to get rich quickly and fairly easy to get rich slowly. Using pension plans and RRSP, TFSAs and RESPs to accomplish your family’s plans can be done well over time but the ‘get rich quick’ schemes rarely work out.
Find a strategy you are comfortable with and run it as a discipline. If you are going to buy and hold, never deviate. If you are going to move with certain market cycles like a momentum system, or act like a value manager, do this and never change it. Make sure you do your homework up front to get a working system and then never change. Mistakes in investing comes from emotion.
But none of that happens without a strategy
The spending strategy that works best is using 25% of your net, monthly income to build your net worth. Not only do you have funds available to build assets and pay down liabilities but you also create a buffer in case something bad happens. You aren’t living at capacity with your finances, you have options.
And that is financial security.
Chris Worby is a Trusted Regina based financial advisor and Wealth Management services provider servicing local Regina households and businesses. Since 2001, Chris has been committed to providing a high standard of financial service to individuals, families and business owners. Chris listens and provides a personalized financial plan.