7 Financial Numbers You Should Know

Being financially literate means acquiring an extremely helpful body of knowledge. Possessing this particular body of knowledge is this a rare phenomenon in today’s world that having it, particularly if coupled with some financial discipline, is similar to a superpower. While I speak, I often demonstrate the significance of financial literacy using a section of the discussion entitled “Numbers You Should Know”. Now, I wish to hit seven financial numbers you should know. As we go together, I want you to look at every number and then BEFORE reading the paragraph under , explain to the reason why the amount is important. The more of these you understand, the more financially literate you are. If you receive a perfect score, then we could use your help about the WCI Forum, the WCI Subreddit, and the WCI Facebook Group answering inquiries!

1 percent

Our first financial number you should be aware of is 1%. Why does it matter? It usually matters because it is considered by many to be the market standard for investment management and advisory charges . The predicament is that it is a fairly bad way to charge for many things. As an example, if you are only paying 1% of your assets under control a year to get advice and support, along with your portfolio is only worth $10,000, this adviser will go bankrupt trying to serve you for only $100 a year. Meanwhile, someone using a $10 Million portfolio is paying $100,000 for the exact same provider, which is at least 10X too much! The point of understanding this amount is that you need to have the ability to convert AUM fees each year to a flat fee and then compare the cost paid into the value received to ensure you are still paying a reasonable price.

1%

Okay. I cheated. I used exactly the same amount twice. 1% is also a rule of thumb in the real estate investment world. Here, the 1% rule implies that in order to get a property to execute well you should be able to charge 1% of its value every month in rent. Hence a $100,000 property should rent for $1,000 a month. You need to have the ability to charge $5,000 a month for a $500,000 real estate. Like any rule of thumb, it isn’t ideal, but it is not a bad place to start. It will help you understand that if you can just charge $800 a month to get a $250,000 property which you are banking on severe appreciation in order to find a decent rate of return on your investment.

4%

4% is a huge one. This one came from the Trinity Study which asked that the question “Historically what percentage of my portfolio, adjusted upward each year with inflation, would I have withdrawn every year in retirement and likely not have run out of cash after 30 years? ” The answer is about 4%, frequently referred to as a “Safe Withdrawal Rate” (SWR). The best usefulness of the 4% rule isn’t a retirement withdrawal strategy, yet. The best utility would be to reverse engineer the equation to understand you need about 25X what you spend in order to be financially independent. This assists in goal-setting.

20%

20% represents my advocated savings speed . A typical high-income professional, like a physician, should save about 20 percent of gross income every year of her career to be able to maintain her quality of living . The number is likely closer to 15% for a typical average Joe who has a more career and will get more comparative benefit from Social Security. If you would like to retire sooner, you will need to save even more. This amount doesn’t include other savings goals like college, a house downpayment, or a Tesla fund. The point of understanding this amount would be to encourage you to calculate your savings rate every year and improve it before it gets into the range you need to satisfy your objectives.

35%

This is probably the hardest one on the listing that you understand at a glance. That is because it actually should be noted as a selection of 25-50%. This amount represents the percentage of a high-income professional’s summit salary that you will need your portfolio to replace to be able to maintain your quality of living . Many financial advisors use 70% as an estimate of everything one will need in retirement, however that amount is far too high for your typical high-income professional. Consider each of the expenses you’ve now that will go away in retirementthe majority of your income tax, all of your payroll taxes, all of your retirement savings, and all of your work expenses, and all of your college savings, and all of your child-related expenses, and your term life and disability premiums, and much of your transportation expenditure, etc.. The amount will differ for everybody, but in the event you’re going to run the numbers on your own, you will probably find it is between 25% and 50%.

45%

That is yet another one from the real estate investing world. Sometimes called the 45 percent rule and occasionally called the 55 percent rule, this suggests the percentage of accumulated rent that will go toward non-mortgage expenses like maintenance, taxation, deductions, utilities, management, and updates. Several new real estate investors become frustrated when they realize that despite amassing more in rent than the mortgage costs, they nevertheless possess a lien bad land. If they had understood that the 45 percent rule, this wouldn’t have been surprising for them. If your mortgage costs over 55 percent of the anticipated rent, you are probably not going to really have a cash flow positive property. Either get a lengthier mortgageput down more money, or find a better home.

72

The rule of 72 is a quick and easy way to tell how much time it will take your cash to double (in nominal terms) at a given rate of recurrence. It demonstrates that the ability of compound interest. If you earn 10 percent on your investment, then it is going to double in 72/10 = 7.2 years. Should you earn 7.2percent on your investment, then it is going to double in 72/7.2 = 10 years. Should you earn 3% on your investment, then it is going to double in 72/3 = 24 years. You can also use this to debt. If your student loan is at 6.8percent and you are not making payments, then it is going to double in size over 72/6.8 = 10.6 years. A 29 percent charge card debt may soon probably double in 72/29 = 2.5 years.

The numbers in this informative article each reflect a rule of thumb that’s worth understanding and establish your degree of literacy. How can you do? Compare your score on the scale below:

0-1 You’ve got a very long way to go. Keep reading the blog.

2-3 Nice function. You’re paying attention.

4-5 Impressive. You are a lot more literate than many of your coworkers.

6-7 Come over to your forums. We could use your assistance.

What do you think? What additional “numbers” (rules of thumb) do you think a financially literate high-income professional should understand? Comment below!

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