Guidelines Financial Planners Use
April is Financial Literacy Month! In honor, I’d like to share the guidelines I use to answer the questions I frequently field as a CERTIFIED FINANCIAL PLANNERTM. People often ask me, “How much should I be saving?” and “What’s a reasonable amount of money for me to put away for my kids’ education?” The answers to these questions vary according to each person’s financial situation and values, but here are some good starting points:
Emergency fund – This is one of my 3 financial ground rules that bear repeating: You should have six months of expenses tucked away in a separate savings account that you would only tap in a time of true emergency. The purpose of this fund is strictly to be there if you lose your job or experience an extended, expensive illness. For tips on finding some additional cash to save, check out my Penny Pinchers article over at Feed the Pig.
Education funding – Your annual savings depends on what kind of school you want to send your child to. For public, in-state universities, strive to save $1,000 each year for 18 years. For a semi-private university, shoot for $3,000 per year, assuming about $15,000/year in tuition. And if you want to send your kid to an elite private school? Plan to save $6,000+ per year for all 18 years.
Retirement amount – If you wish to retire in your early 60’s, you’ll need to have saved about 16 times the annual amount you’ll need to live on. In other words, if you think you’ll need $100,000 per year to live on during retirement, then you’ll need $1,6 million saved in order to retire.
Retirement savings rate – Assuming you start saving early, putting 10-12% of your income toward retirement should get you to your goal above (saving for education is extra). And I’m a huge fan of starting early – not only does it help to establish the habit before you’re burdened with additional costs like owning a home and raising kids, but you’ll have compound interest on your side. Save early, save often!
Life insurance – If you need life insurance (the typical reason you’d need it is because you have someone dependent upon your income who would be financially devastated if you passed away), a typical benchmark is 10-16 times your annual salary. So if you make $75,000 per year, you should have at least $750,000 in life insurance.
Health insurance – It’s tough to know which type of plan to choose when usually the options are so different from one another. When choosing a plan for myself, I always look for two things: hospital coverage (you want 100% coverage after a low deductible is met – most hospital stays exceed $10,000, easily) and at least a $1 million lifetime cap. Anything lower and even a minor health issue could have you up against the cap.
Of course these are not set-in-stone rules, but instead suggestions to help Career Girls ensure a secure financial future. What other questions can I answer? Please let me know your questions in the comments below.