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Long-term Success Benchmarks & Rules of Thumb for Household Financial Planning, by CayDen

Updated: Nov 20, 2023


CayDen' Financial Planning Benchmarks & Rules of Thumb


I often come across clients that know what they want to achieve financially, meaning they have goals for themselves and their families. But oftentimes they are unsure of how to get where they want to be. There is a plethora of information available on the internet about how to manage personal finances, so much in fact, that it can be overwhelming to figure out how to apply the information to your individual situation. After all, your financial journey is unique and dynamic to you, with lots of little moving parts to manage. There are many things you can get wrong or right. And your first job is to not blow it! General financial rules of thumb and CayDen’s Financial Planning Benchmarks can further help you succeed financially, now, and over the long run.


Detailed, proactive and comprehensive financial planning is worth it, but it also takes a lot of time and likely necessitates help from a financial planning professional. However, these general rules of thumb and CayDen’s Financial Planning Benchmarks can help you broadly stay on track to reach your financial goals. Some core foundational categories you can focus on, for strong overall financial health and the construction of a sturdy financial foundation include; budgeting, building and maintaining an emergency fund, making yourself attractive to Home Mortgage lenders, and saving for a comfortable retirement. Use these CayDen Planning Benchmarks to confidently plan for the future.


Budgeting


Budgeting. You may be rolling your eyes when you hear the term “Budget”, but the fact is that Cash Flow Analysis, aka “Budgeting” is an important aspect of your financial planning. Having a clear understanding of where your money is coming from, and where it is going to, is incredibly important for planning for the future. Having a clear understanding of your resources and cash flow sets the first layer of bricks on your solid financial foundation.


An accurate budget helps you clearly identify your target living expenses (needs), discretionary expenses (wants), and your surplus (savings) or deficit. Below you will find benchmarks for your three core budgeting categories, “Needs”, “Wants, & “Savings”.


Needs vs Wants vs Savings (Based On Take Home Pay)


  • 50% Needs

    • Housing, food, car-related expenses, medical expenses, and minimum debt payments

  • 30% Wants

    • Clothing, entertainment, vacations, and restaurants

  • 20% Savings

    • Emergency Fund, retirement plan, brokerage account, and extra payments towards debt(s)







Emergency Fund


Your Emergency Fund is your smart place to access money from when you need it most. It’s not a question of IF a financial rainy day will come your way, but WHEN. So you need to be prepared for the certainty of life’s uncertainty.


Emergency Funds can be held in a checking, savings, or brokerage account. But the primary goal of your Emergency Fund is liquidity and accessibility. Therefore it should be in cash or cash-equivalent, liquid investments, such as a Money Market Mutual Fund.





Emergency Fund Rules Of Thumb (Target nominal funding level)


  • Single

    • 3-6 months worth of Living Expenses

  • Dual Income Household (no dependents)

    • 3-6 months of Living Expenses

  • Dual Income Household with Dependents

    • 6-12 months of Living Expenses

  • In Retirement

    • 12-24 months after accounting for other predictable income sources






Home Purchase


Purchasing a primary home will be one of your largest financial transactions. Since it is unlikely you will be able to afford a house with your cash savings alone, you will likely need to acquire financing from a lender. Mortgage lenders are going to closely examine your financial situation to determine how much they will lend to you and on what terms. With this purchase being one of your largest lifetime financial transactions, you want to ensure that you are getting the best terms available. To get an attractive mortgage interest rate, you must have an attractive financial situation in the eyes of the lenders. Below are benchmarks to keep in mind for being attractive to a Mortgage Lender.



Home Purchasing Benchmarks


28%: Target having less than 28% of your pre-tax income set to go towards Principal and Interest, Property Tax, HOA Fees, and Homeowner Insurance Premiums.


36%: Target having less than 36% of your pre-tax income to service all forms of debt (student loans, revolving consumer debt, auto loans, mortgage, etc.)


20% Down Payment. A 20% downpayment is the most cost-effective approach because it means you avoid paying Primary Mortgage Insurance (PMI). PMI is a cost with no return on investment for you. So it should be avoided when possible.




Retirement Savings


The two biggest questions I get from my clients are: 1. How much do I need to retire? and 2. When can I retire?


Well, it depends on when you start! The more time that you have to save and invest for retirement, the better. The lower your current living expenses are, and the higher your savings rate, the faster you will reach your own version of Financial Freedom. Below are some benchmarks to keep in mind for targeted retirement savings.



Retirement Savings Benchmarks:

  • If you start in your 20s, save 10% - 15% of your salary, including your employee match, per year for retirement


  • If you start in your 30s, save 15% - 20% of your salary, including your employee match, per year for retirement


  • If you start in your 40s, save 25% - 35% of your salary, including your employee match, per year for retirement


  • If you start in your 50s or later, save as much as possible! You may have to consider retiring later too.



Remember, these benchmarks and financial rules of thumb can’t replace proactive, consistent financial planning. But they can help you maintain strong overall financial health and put you in a position, with focus and hard work, to realize your financial goals over the long run.



Want help from a CERTIFIED FINANCIAL PLANNER™ professional? Reach out today by emailing us at invest@caydenwm.com. Or, schedule your Free Financial Review and Intro Meeting using this link: https://calendly.com/caydenwealthmanagement/introductory-call?month=2023-10



About the author: Shane Dennehy is a CERTIFIED FINANCIAL PLANNER™ professional, as well as the President and Sr. Wealth Management Advisor at CayDen Wealth Management, a Colorado registered investment advisory firm with offices located in Broomfield, Colorado and Charlotte, North Carolina. Shane works out of CayDen Wealth Management's Broomfield office, providing virtual, fiduciary, comprehensive wealth management and tax services for high performing professionals and their families. Services include proactive Financial Planning, Investment Management, & Tax Services.



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