The 40% Rule
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The 40% Rule
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Re: The 40% Rule
#2You could apply the 40% rule to personal finances as well. If your income/salary is increasing 20% a year, put 20% into savings. If your income is increasing 5% a year, put 35% into savings.
Re: The 40% Rule
#3You could apply the 40% rule to personal finances as well. If your income/salary is increasing 20% a year, put 20% into savings. If your income is increasing 5% a year, put 35% into savings.
I disagree, in personal finances you aren't afforded the same kind of burn rates because there isn't an investor model for individuals. If my salary has increased 100% YoY for the last 3 years, I would be in a troubling amount of debt.
This applies in reverse as well, if you take a salary cut you likely aren't going to be able to save more money as a result.
For personal finances I think its better to tease out a baseline amount for expenses and save everything above that, re-calibrating occasionally as required.
Re: The 40% Rule
#4You could apply the 40% rule to personal finances as well. If your income/salary is increasing 20% a year, put 20% into savings. If your income is increasing 5% a year, put 35% into savings.
I disagree, in personal finances you aren't afforded the same kind of burn rates because there isn't an investor model for individuals. If my salary has increased 100% YoY for the last 3 years, I would be in a troubling amount of debt. This applies in reverse as well, if you take a salary cut you likely aren't going to be able to save more money as a result. For personal finances I think its better to tease out a bas…
Banks invest in individuals by offering loans.
Re: The 40% Rule
#5Earlier quoted context omitted.
I disagree, in personal finances you aren't afforded the same kind of burn rates because there isn't an investor model for individuals. If my salary has increased 100% YoY for the last 3 years, I would be in a troubling amount of debt. This applies in reverse as well, if you take a salary cut you likely aren't going to be able to save more money as a result. For personal finances I think its better to tease out a bas…
Banks invest in individuals by offering loans.
Loan = Investment?
Re: The 40% Rule
#6[deleted]
Re: The 40% Rule
#7You could apply the 40% rule to personal finances as well. If your income/salary is increasing 20% a year, put 20% into savings. If your income is increasing 5% a year, put 35% into savings.
I disagree, in personal finances you aren't afforded the same kind of burn rates because there isn't an investor model for individuals. If my salary has increased 100% YoY for the last 3 years, I would be in a troubling amount of debt. This applies in reverse as well, if you take a salary cut you likely aren't going to be able to save more money as a result. For personal finances I think its better to tease out a bas…
This is exactly what people do when they go to school: they take on huge amounts of debt in order to make their income grow by >100% YoY for a few years.
Very few incoming college students know enough about finance or exactly what different choices will payout to make smart trade-offs in this area, but this reasoning is pretty common with MBA and Law School students. Occasionally it even works; I've known a few young lawyers who ended law school with $200K in debt, but it was paid off within 4 years and their income was roughly 8x what it was before law school.
Re: The 40% Rule
#8Earlier quoted context omitted.
Banks invest in individuals by offering loans.
Loan = Investment?
A loan is typically the textbook definition of an investment..
Banks give a student X dollars, after college the student pays X + i. The bank takes some risk and receives more money than they started with. I'm not sure how it wouldn't be an investment.
Re: The 40% Rule
#9You could apply the 40% rule to personal finances as well. If your income/salary is increasing 20% a year, put 20% into savings. If your income is increasing 5% a year, put 35% into savings.
I disagree, in personal finances you aren't afforded the same kind of burn rates because there isn't an investor model for individuals. If my salary has increased 100% YoY for the last 3 years, I would be in a troubling amount of debt. This applies in reverse as well, if you take a salary cut you likely aren't going to be able to save more money as a result. For personal finances I think its better to tease out a bas…
Not sure why this won't still work in theory.
100% YoY increase:
Salary Year 1: $100 - you are allowed to go $60 into debt
Salary Year 2: $200 - you are allowed a further $120
Salary Year 3: $400 - you are allowed a further $240
Salary Year 4: $800 - your total debts are still around half a year's salary, which is only modestly troubling - banks would most likely be happy to service your debt at a competitive rate.
If you recognise your period of fast increasing salary is over, you are now advised to save $320 - which pays off much of your debt.
In practice, there are some other problems which you partially recognise - depending only on salary doesn't give you a diverse portfolio of investment; salary is more likely to suffer an unexpected shock than business income; expenses are difficult to reduce.