I've developed my own person philosophy for financial matters. Or maybe I forgot about the exact source. I call it the '70-10-10' rule.
Here's how it breaks down:
No more than 70% of your income should be dedicated to monthly obligations - loan payments, that 2 year cellphone contract, groceries, average utilities, etc... Basically, if you can't drop it without significant penalty within a month, it goes in here.
10% - Retirement. If you start at age 22(18+4 yrs college), that's 45 years of income to save up. This should, without any problem, give you enough money to retire on. If you're pessimistic, increase to 12%. I'm unwilling to get more specific, as individual variations in situation will outweigh small percentage changes; may need to be increased if you didn't start early.
10% - Emergency. I'm not going to get real specific, but 'sale on shoes' or 'need a big screen TV for the superbowl' don't count. 'Car broke down' may, as might 'sudden illness'. As a dissentive to using it frivolously; you should first exhaust your monthly free(luxury) budget on the necessety, then the allocation for the emergency fund, then dipping into the actual fund.
Remainder? Luxury fund! No matter how much or little you make; you need a little bit for the niceties in life.
Numbers:
Let's say I make $3k/month. No more than $2.1k should be consumed by stuff like my home, insurance, utilities, groceries*, etc...
$300 to retirement ($3.6k/year). $300 to emergency.
$300 'mad money', plus whatever I manage to keep out of the $2.1k non-discretionary spending.
Some reasons behind this:
Why the 70%? - Well, a multitude of reasons, but mostly because unemployment insurance tends to only cover ~70% of your income. This way, you can drop back your expenses and use your emergency funds as necessary for oddball stuff, but aren't draining them too much, even if the unemployment period becomes extended. If you end up getting a new job for less money, time to start transitioning to to the lower monthly obligation limit.
10% savings? Assuming 8% year, will grow over a 45 year working period to enough money to replace your income, even assuming some hiccups. I assume medicare/SS takes care of medical.
10% emergency - they always happen. If you're lucky and don't touch most of the money, call it your early retirement fund.
Personally, I run 90% of my finances through my credit cards. What does this translate to? I KNOW my expenses before I actually have to pay them. I've been very successful in avoiding tapping my emergency fund by dropping my optional expenses(movies, eating out, etc...) after an emergency pops up to pay for it.
What do you think?
