The New Money Math (Source: Men’s Health)

Men’s Health magazine had an article in its December 2008 edition related to personal finances, so I thought I would share it with the readers of this blog (Thanks to Germano for letting me rip this out of his subscription).  The tag line of the article was “The current economic mess happened because lenders, and then borrowers, threw out all the rule books.  Here are 7 new guidelines to live (well) by.” 

15 TIMES YOUR DESIRED ANNUAL RETIREMENT INCOME equals: the amount you’ll need to save to retire at age 65.  The article even ignored inflation, because salaries and portfolios tend to rise with it, and also social security, because its future is uncertain.  The other variables used were an assumption of 8 percent annual return on your portfolio, and 7 percent per year withdrawal.

30 PERCENT OF YOUR CREDIT LINE equals: the maximum amount you should owe on any one credit card.  It seems as though this measure was driven by how it would effect your FICO score.  The article goes on to say that less than 10% of your credit line is ideal.  My own personal advice would be to solely use your credit cards for emergency-type purchases, corporate travel purchases, etc. and to keep your credit card balance at ZERO ($0) for as often as humanly possible.

28 PERCENT OF YOUR GROSS MONTHLY INCOME equals: the sum you can safely spend on monthly housing costs.  I thought this number was a bit arbitrary, as I have always heard that 28 – 33% of your gross monthly income could go towards housing costs, according to many online calculators.  According to the article, “this percentage was formulated by federal regulators who began insuring mortgages in the wake of the Great Depression, says Vern Farnsworth, director of public policy for the National Foundation for Debt Management, a nonprofit financial educator.”  So, for example, if your household annual income was $100,000, your monthly gross income would be $8,333.  28 percent of this monthly gross income is $2,333.  So, this calculator would state that you could afford monthly housing costs of this amount, which should include your mortgage, insurance, property taxes, and homeowner’s association dues (if applicable).

8 PERCENT OF YOUR GROSS MONTHLY INCOME equals: the sum you can safely spend each month on other debt.  According to the article, this would include, auto loans, student loans, credit cards, and utilities.  My wife and I have paid off two car loans and one student loan all in 2008.  The only debt we have, other than our home mortgage, is my student loan.  I think we are going to stay the course on this loan, since it’s interest rate is a low 2.875%, however, it would be nice to be debt-free except for our house.

25 TIMES YOUR DESIRED ANNUAL RETIREMENT INCOME equals: the amount you’ll need to retire whenever you damn well feel like it.  This is a calculation that I am glad the article portrayed.  I am sick of “this is how much you’ll need to retire at age 65 and live til your 90″ stuff.”  What if I want to retire at 50 and start a business, or travel the world, or become an author, renowned speaker, or build an empire?  Well, this article states that you will need 25 times you desired annual retirement income.  Case in point, if you want $100,000 per year, save $2.5 million and you should be set.

60 MONTHS equals: the maximum length of your car loan.  I couldn’t agree with this more.  However, I will preach on this website, to follow Suze Orman’s thinking of if you can’t afford a car loan of 36 months (3 yrs), than you can’t afford the car.  Her maximum car loan length is 36 months, with good reason.  I can’t believe there were 72 and 84 month car loans, to make the monthly payments “more affordable.”  What is more affordable about that?  More interest income for the lender, that’s what!

ONE-THIRD OF THE TOTAL COST OF COLLEGE equals: the sum you should save for your child’s education.  College costs have been increasing every year, and planning for paying for college is becoming increasingly important.  The one piece of advice I would give, and the article states as well, is that retirement comes first.  “You can secure financial aid for college, but I haven’t found anyone who gives financial aid for retirement.”  One way to save for college is through a 529 savings plan, which you can read more about here.