Question: How much of my income should I save? How much of my savings should I allocate for retirement, education, emergency funds and other future costs?—Allan Magtoto, corporate employee via e-mail
Answer: There are no hard and fast rules when it comes to these things. Personal finance is very personal and concerns like these are relative and subjective. Ratios and formulas are broad gauges and theoretical in nature. A more thorough personal analysis is the best approach to answering your queries and a professional financial planner is the best person to answer your query. It will be in your best interest if you see one.
I can give you some suggestions that may provide some broad stroke answers to your questions.
In my talks and seminars, I often talk about the 70-30 rule at great lengths. It means that for every 100 percent of your net income, you limit your spending to 70 percent and save and invest the remaining 30 percent. In the past, we have heard about saving 10 percent of your income and you will be OK. I’ve done the math and 10 percent will simply not cut it. Considering inflation, accumulating just 10 percent of your income will not be enough for the many life events that you will need to prepare for financially. However, 10 percent is indeed a good start especially for those who are having a difficulty setting aside money on a regular basis. As you get a better handle on your finances and as your income goes up over time, increase the percentage allocated for your savings and investments until it reaches the ideal rate of 30 percent. For the younger ones with no dependents yet, a higher percentage of savings will be a great idea and will allow them to get a much-needed head start in an uncertain future. The 30-percent savings can be used for the many events that we need to plan for.
For emergency funds, allocating three to six months’ worth of your expenses would be a great hedge against whatever emergencies you may have to deal with, including sickness or loss of employment. Many of us do not have emergency funds, which is unwise. I recommend you start with building your emergency funds first before tackling the other concerns. Once you have done this, then you are ready to start preparing for your other life events.
As to education, it is best if you can compute estimates of the escalation of tuition costs and match those with appropriate investment planning, which a professional financial planner should be able to help you with. Again, and for the interest of this column, I would give you a ratio that can be a good broad rule: allocate 10 percent of your income for future educational needs of your children. Savings for education should be invested properly so that the growth of the funds will overtake the rising cost of education. You may want to do regular investing for the next 10 to 15 years of the child, which should be able to cover future education costs. Pooled funds like UITF or mutual funds might be a good choice as an investment instrument, among others. If the funds exceed the actual educational costs of your children, you may want to divert the excess to other needs like retirement funding.
For retirement, 10 percent of your income is also a good theoretical ratio. Retirement, like most things in life is relative. If you plan to have a very comfortable and luxurious retirement, then it will take you more than just 10 percent of your income. However, a decent retirement should be able to be achieved with regular retirement investing for at least 20 years. Retirement is a long-term need so it is best financed by long-term investments like real estate, stocks, mutual funds, UITF and business ventures. The longer you prepare for retirement, the better it will be for you to grow your capital. Long-term investments will allow you to wait out the volatility of the investment environment. As a general rule, investments, though fluctuating, should go up over time.
Another 10 percent of your income can be for a general savings fund, which you can use for other plans like equity for your home, family vacations, seed for business capital. Just make sure that you invest your savings properly and you understand the relationship of risks and returns.
Let me reiterate that what I wrote here are merely broad stroke allocations and should only be followed as a general rule. We all have individual needs and preferences; therefore, we should have individual planning. Certain financial requirements may take precedence over others—a home might be a priority over retirement during the earlier periods of your life.
You can learn more about personal financial planning and the rudiments of investment planning in my Steps to Financial Planning 2012 seminar, to be held on May 18 at the Victory Center in V Mall, Greenhills; May 26 at Parklane Hotel in Cebu; and June 2 at the Grand Oases Hotel in Davao. For inquiries, send message to 0939-1177856 or 0927-8731511 or email to jcignacio.magalong@gmail.com
Randell Tiongson is an advocate of life and personal finance. He is a director of the Registered Financial Planner Institute (Phils.). Learn financial planning at 28th RFP program on July 21-Sept 15. For details, email info@rfp.ph