Tags: Moyer | debt | income | stress

Financial Planner Garrett: Keep Debt Below 36 Percent of Income

By    |   Friday, 13 March 2015 08:40 AM

Heard enough about the Federal Reserve's stress test for 31 big banks? You should consider conducting a stress test of your own — on your personal finances.
 
Liz Moyer of The Wall Street Journal offers several guidelines. 
  • Debt-to-Income Ratio. To calculate your debt-to-income ratio, divide your debt by your pretax earnings. A good rule of thumb is to keep it below 36 percent including mortgages and 28 percent excluding mortgages, Sheryl Garrett, founder of the Garrett Planning Network, tells Moyer.
  • Assets. Banks are judged by the liquidity and quality of their balance sheets and their ability to cope with a run on deposits. In the same vein, you should look at the liquidity and quality of your assets and how well they would handle an immediate call by your creditors, Eleanor Blayney, consumer advocate for the CFP Board, which oversees certified financial planners, notes.
  • Emergency savings. Make sure you have some, but most financial planners suggest having enough to cover at least three months' worth of expenses. The greater your potential expenses, the greater these savings should be.
On the retirement front, conventional wisdom is very convenient for planning your finances, but it is also often wrong. So you need to take any adage you hear with more than a grain of salt.
 
Tom Sightings of U.S. News & World Report lists several myths concerning retirement finances.
  • "Social Security will pay your bills. Social Security alone probably won't be enough to provide a comfortable retirement," he writes. "The average Social Security retirement benefit is $1,328 a month. Do you really think you can live on $15,936 per year?" Sightings asks.
  • "Inflation is low, so don't worry about it." True, consumer prices actually declined 0.1 percent in the year through January, the first 12-month fall since October 2009. "But remember the 1970s and 1980s, when inflation more typically came in at 5 percent?" At some point inflation will rebound, possibly during your retirement.
  • "Maybe you'll receive an inheritance. The key word is maybe." 
"None of this is meant to frighten you, but to forewarn you about latching on to a myth or rumor when making important retirement decisions. Retirement rules of thumb often need to be adjusted to fit your personal circumstances," he writes.

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Heard enough about the Federal Reserve's stress test for 31 big banks? You should consider conducting a stress test of your own — on your personal finances.
Moyer, debt, income, stress
372
2015-40-13
Friday, 13 March 2015 08:40 AM
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