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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