3 ratios to live by for financial wellbeing
Canadians feel the squeeze when it comes to housing costs. In fact, we spend more income on housing than almost anyone in the world according to a global survey conducted by money manager BlackRock Inc. The survey also shows that nearly half of respondents said they are concerned that they will outlive their savings come retirement time. Likewise, Canadians owe $1.67 for every $1 of disposable housegold income, according to Statistics Canada. These trends form a recipe for financial disaster. But, help is here my friends. Here are three ratios to live by for your financial wellbeing.
Save 10% of each paycheque towards your retirement
A good rule of thumb is to save 10% of your salary towards your retirement fund. However, a quick search online will show you some disparate ideas. For instance, a 22-year-old with several decades until retirement can save a lower percentage of their income than a baby boomer just starting to save for retirement. It all depends on your personal situation.
You may have plans to buy a house in Toronto, which means you may not be able to save 10% every paycheque for retirement. But, don’t forget to take advantage if your employer is matching your savings. You may only have to save 5% iif your company matches your contributions dollar for dollar. Conventional wisdom is that the magic number is 10%, but you should always act according to your personal situation. My advice would be to automate your savings at the percent you think feels right, then scale up or down depending on what you can set aside.
Spend maximum 35% of pretax income on housing each month
The global survey mentioned earlier touched on how Canadians are struggling with high mortgage, rent and utility payments. Part of the problem is the market. The other part is the desire people have for big, luxurious house they cannot afford, for fear of missing out.
The survey also mentions that Canadian poll respondents said they spend 43% of each dollar of household income of housing-related costs. WOW. Akin to the 10% rule, this 35% is just the same – a rule of thumb. If you hate debt, then your housing expenses should not be more than 25% of your take-home income each month. If that means buying a smaller house, then that's what it will take. Likewise, your 35% might change if you have kids, buy a new car, or worst of all, lose your job? Final word: The less you spend on your house, the more money you have available to save and enjoy your retirement.
Try never to exceed the debt to income ratio of 50%
Debt is a dirty word and you should hate it. If you can, try to avoid debt like rattlesnakes. Sure, in some circumstances, we have to take on debt, as it is essentially impossible to make certain purchases (like a house) without taking on debt. So, what should be your debt to income ratio then? According to Consolidated Credit Counseling Services of Canada, your debt-to-income ratio should be 36% or less. At 37% to 49%, you should be concerned about your level of debt, and at 50% or more, you should seek out professional assistance to severely reduce your debt. They also have a cool debt-to-income ratio calculator on their website. You can try it here.
Remember: not all of these ratios mentioned above are black and white. In truth, the best advise is that each one depends on your individual situation. The only thing you can do is have a financial plan, which will help you find YOUR exact number. Please take some time to review your financial plan; it may only take an hour or two every year, but it will make a huge difference to your financial health. Please don’t play the busy card.