By Lonny Greenberg

financial planning

With the stock market charting record highs, the temptation to plunge into potentially risky investments is strong. We’ve all heard the stories of somebody making a killing on the bitcoin market, for example, and the lure of keeping up with the Joneses can be seductive. It’s also a very bad idea. Investing is like basketball: there are very popular players who can be flashy, but in the long run, the most successful ones are those with the best grasp of the fundamentals.

With this in mind, here’s my list of the top 10 financial fundamentals for the coming year and beyond.

1. Cash Management: Keep emergency cash reserves on hand equal to about six times your normal monthly living expenses.

2. Home Purchase: The cost of a new home should be less than three times your gross annual household income.

3. Homestead Debt Management: Your mortgage principal and interest + property taxes + property insurance should be less than 28 percent of your gross annual household income.

4. Life Insurance: Depending on age and lifestyle, the amount of life insurance your family carries should be 10 to 15 times your gross annual income per insurable life.

5. Upside vs. Downside Math for Investors: If you’re down 10 percent, you will need to make up 11.11 percent to get back to even. Down 25 percent requires 33.33 percent up; down 50 percent requires 100 percent up; and so on.

6. Investing’s Rule of 72: Divide 72 by the annual interest rate to determine how long an investment will take to double. For example, 72 divided by a 6 percent rate of return would equal 13 years.

7. The Age Rule for Investing in Stocks: To calculate what percentage of your portfolio should be invested in long-term, aggressive assets, subtract your age from 120. If you’re 50, for example, invest 70 percent in stocks and 30 percent in bonds or conservative assets.

8. Retirement Savings: Put aside 10 percent of your gross income each year towards pre-tax retirement savings.

9. Retirement’s 4 Percent Withdrawal Rule: This rule applies to those who wish to fully preserve their assets at death, leaving their estate entirely intact for the family.  Should this be the case, you should only withdraw a maximum of 4 percent of your investment asset principal each year in retirement, assuming a moderate-risk level investment allocation.

10. Retirement Nest Egg: Have at least 25 times your current annual gross income in investment savings prior to retiring.

A word of caution: these rules of thumb are general benchmarks and are just the tip of the iceberg. While they may prove useful in readjusting your thinking, remember that you need to look at your whole financial picture in relation to your specific goals.

Try to be realistic and grounded, not competitive. You don’t know the whole story behind that windfall your friend’s cousin just made. He/she may have come into an inheritance. He/she may be doing well at his job. Or maybe they just got lucky.

Before making a major financial decision, it’s wise to consult an unbiased professional who can see beyond the hype and help make decisions based on the reality of your personal financial situation – as opposed to decisions based on perception of others.