A Formula For Success

When I was a young fellow about 50 years ago, a very humanistic teacher by the name of Percy Wells talked to a class of students about money and his formulas. Just as today most young fellows and gals wanted their own car, Percy’s formula was, don’t buy a car whose value exceeds one years net wage. In those days young workers earned $2,000.00 – $2,500.00 yearly. That of course meant the car couldn’t exceed $2,500.00.

He also had a formula on house buying. Percy said, you should save 1/3 for a down payment and your monthly payment shouldn’t exceed 25% of your net take home pay. For example, if a house sold for $10,000.00 – $3,300.00 = $6,700.00 @ 6% amortized over 10 years is 74.13 x 12 = 889.56 x 4 = $3,558.24 income yearly. To buy this $10,000.00 house you had to earn $3,558.24 in income yearly.

Our first house in Hinton was our butcher shop conversion which cost us about $7,500.00 and I was earning $5,200.00 per year, so it easily fit into Percy’s theory.

Unfortunately, house value appreciation is not a certain as it was in the late 70’s or early 80’s. It seems you have to be in the right place at the right time. Percy’s formula is still a pretty good one, even now, except the values are 10 times what they were when we first purchased our home.

Savings have always been a concern. Many financial gurus advocated a savings of 10% of your gross income. Pay yourself first they say. I know for sure you have to be methodical and persistent to achieve any savings goal.

There is a whole lost of confusion as to how much money people should invest in stocks, bonds and mutual funds as opposed to the amount they should keep in anti-recession fixed dollar assets.

Here is the philosophy I like:

Until 50% of one year’s income is built up in an anti-recession cash fund in fixed dollars, that you know you can get your hands on at anytime, do not invest in equities at all. That means don’t speculate with your money until you have at least 50% of one full year’s income in cash or cash equivalents in savings. When you have 100% of one year’s income you can invest 25% in equities and 75% in fixed dollar assets. Then when you have 200% of one year’s income built up. you can put 50% on equities and 50% to fixed dollar assets. As your percentage builds up, you can devote up to 65% in equities.

I think this is still a pretty good formula and with a systematic savings program, you will have 2 years of income in dollars available for any crisis situation.

Try some smart saving, it will pay off.

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