Your Money > Smart Assets
A cheat sheet for millionaires to be
There's no one way to manage money. But if you're looking for some guidelines, these may help.
August 4, 2003: 10:00 AM EDT

NEW YORK (CNN/Money) You don't want to spend months reading personal finance tomes. And you don't want to make a second career of managing your money.

You just want to do a quick "How you doin'?" check on your finances.

Wealth Building
Saving during lean times
3-step retirement plan
What are you worth?
The ideal budget

So we've compiled a list of some rules of thumb that you might hold up against your budget, debt, savings, life insurance and net worth.

Keep in mind, these rules represent guidelines, not gospel. Life doesn't always stay inside the lines, and what may work for some may not work for you.

Nevertheless, these are worth aiming at if you're ready for some target practice and want to build a serious financial cushion.

How much should I save? In addition to maxing out your retirement plans such as your 401(k) or IRA, try to save at least 10 percent of your take-home pay for other goals, such as an emergency fund, college or a new home.

Certified financial planner Karen Altfest said the 10 percent rule is okay for people who started saving when they were young and have done so consistently through the years. But she said if you're 40 and are just starting to save, you might consider bumping up that amount to 30 percent of your take-home pay.

In either case, if you can, feel free to save more. The 10 percent isn't an absolute top, said certified financial planner Barbara Steinmetz. "This is the lower limit."

How much house can I buy? If you're buying a home and don't want to feel stretched over hot coals for years to come, the home shouldn't cost more than two-and-a-half times your gross income.

Granted, that's hard to swing in high-priced cities like New York and San Francisco. In that case, Altfest and Steinmetz said, you might try to save an extra-large down payment. You won't have to carry such a big mortgage and your monthly payments would be close to what you'd pay if you'd purchased a less expensive home.

How much debt is too much? Ideally, experts say, your total monthly long-term debt payments -- including your mortgage, credit card payments and loan payments -- should not exceed 36 percent of your gross monthly income.

Even if you don't have a mortgage yet, that's not a license to load up on credit card debt. As always, planners recommend you banish it as quickly as possible since there is nothing redeeming about credit card debt interest rates and fees are high, payments are not tax-deductible, and often you end up spending far more on a purchase than its sale price.

What's the most effective way to pay down credit card debt? Allocate a fixed amount each month to the task, and have it withdrawn automatically from your checking account, if possible. Your priority should be to pay off your high-interest rate debt first, while continuing to make at least the minimum payments on your other bills.

The exception is if you have a card with a low rate that expires in a short amount of time. In that case, you might wish to make it a priority to pay off that card's balance before the rate is revised upward. (To figure out how long it will take to pay off your credit card debt, click here.)

What should my net worth be? According to the bestselling book "The Millionaire Next Door," if you're interested in being a "wealth accumulator" your net worth should equal your age times your pretax income divided by 10. That number, minus any money you inherited, should be your net worth for your age and income.

So if you're 40 and make $75,000 a year, you should have a net worth equal to $300,000, assuming you have no inheritance. If you want to secure your position as wealthy, your net worth should be double that number.

Remember, your net worth is your assets minus your liabilities, and your assets include not only your cash, investments and home equity, but also tangible property such as jewelry and furniture. (To figure out your net worth, click here.)

Granted, this isn't always a one-size-fits-all formula. A 30-year-old with big student loans from graduate school making $75,000 a year might have a hard time coming up with a net worth of $225,000, for instance, and not necessarily because he's wasteful with money or doomed never to be wealthy. Or, Steinmetz notes, someone near retirement who owns his home outright, has an ample pension and insurance, and has put his kids through school might feel well-off even if his net worth is lower than what the formula suggests.

How much should I have when I retire? As a ballpark estimate, your nest egg should be roughly 20 times the annual expenses you'll have but which won't be covered by pension or Social Security payments. That should enable you to withdraw 5 percent of your savings each year without tapping much of your principal.

So, if you think you'll need the inflation-adjusted equivalent of $50,000 a year on top of what your pension and Social Security will cover, you'd need the equivalent of an inflation-adjusted $1 million nest egg.

The other rule of thumb is to assume you'll need between 70 percent and 100 percent of your income every year in retirement. Given rising medical costs and longer, more active lifestyles in retirements, increasingly planners assume clients will need 100 percent of their current income in retirement.

(To see whether your retirement savings are on track, click here.)

How much life insurance should I have? It's a complicated question, but you can be sure that if you're married with kids, you need a policy that covers far more than that provided by your employer typically two times your salary.

Generally speaking, if you've got young kids or teenagers, you'll need a policy that covers between 6 and 10 times family income and possibly more, depending on your family's expenses and how much your surviving spouse can earn.

Just how much depends, among other things, on how big your mortgage and other debts are, how old your kids are, and whether you intend to put them through college, said certified financial planner Peter Traphagen Sr.

Couples with one stay-at-home partner and young kids also should consider buying life insurance on the non-income-producing partner. The reason: That person contributes economically to the family, and the surviving spouse likely will have to pay for childcare and related expenses.  Top of page

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