1. 50/30/20 rule
This rule applies to how to distribute your income:
50% should be spent on your needs e.g. mortgage/rent, bills, food, work transport, etc.
30% should be spent on your wants e.g. clothes, nights out
20% should be saved or used to pay off debt
For example, let’s say you earn NGN 40,000 monthly (after taxes). You’d save NGN 8,000 (20%) first, then spend NGN 20,000 (50%) on your needs and NGN 12,000 (30%) on your wants.
Note! Pay yourself 1st i.e. once your salary has come in, save 20% immediately.
2. Emergency Fund Ratio
Monthly expenses times six. Why do you need an emergency fund? Well, for unforeseen circumstances like a pandemic! Save at least 6 months of your household expenses so if you lose your job, become ill, etc., you’re prepared for half a year or longer. For example, if your monthly expenses = NGN 10,000, then save at least NGN 60,000 in your emergency fund. If you want to be really prepared, save at least 1 year’s worth of expenses.
3. Mortgage Ratio
Limit your mortgage to 2.5 times your income. You should spend less than 30% of your take-home/post-tax pay on housing. For example, if you earn NGN 800,000 per annum, then your mortgage should not be higher than NGN 2,000,000
4. Investing Ratio
The percentage of your assets in equities should be ‘120 minus your age’. If you’re 35, you should have 85% of your investment assets in stocks and 15% in bonds. If you are more risk averse, you can use the ‘100 minus your age’ rule instead. Still 35 years old, with this rule it would be 65% in stocks and 35% in bonds.
5. Retirement Savings Ratio
Save 25 times your current income. If you earn NGN 600,000 p.a. For example, then your retirement savings would be NGN 15,000,000 (NGN 600k 25). This is one of the most important money ratios you need to save for your retirement, even if you live in a country that provides a state pension (it won’t be enough). If you don’t save for retirement, you could end up working all your life.
6. Life Insurance Ratio
10 times Your Annual Salary. The primary goal of life insurance is to replace your income, which will be used to take care of your family when you die. If you follow the rule, your family will get about 40% of your annual salary each year given a safe withdrawal rate of 4%.
7. Net Worth Ratio
Age times pre-tax income 10. This is a useful ratio which gets you thinking about your long-term financial situation. You may not be worth millions of dollars, as soon as you start working, but with promotions, job changes, pay rises, etc. you’ll get there.