In his groundbreaking self-help book, The Seven Habits of Highly Successful People, Stephen Covey presents an approach to being effective by attaining goals and aligning oneself to “true north” principles of character. His Second Habit teaches us to “Begin with the End in Mind.”
Whenever we teach students or clients the importance of personal financial ratios, we always make sure that we share this principle. The personal financial ratios are a goal to strive toward and a goal to be obtained.
The first step in the process is to create what is commonly referred to as a budget. Susan was the first to coin the phrase “spending plan.” We find this title to be very empowering: it emphasizes choice in spending decisions. Once the spending plan is completed it should be reviewed in light of the following financial ratios.
A realistic goal for Charitable Giving is 10 percent of gross income. Gross income is all income before taxes and deductions. This 10 percent ratio has been around as long as recorded history and reflects the basic need to provide for those less fortunate and who have fallen on bad times. (Editorial comment: this need is best addressed by local communities and not by organized government. The local community is best able to determine who has a genuine need.)
The Financial Independence ratio has also been around for quite some time. The amount that should be set aside for financial independence is 10 percent of gross income. We have carefully chosen our words in the selection of Financial Independence as opposed to retirement.
The concept of ‘retirement’ began when Chancellor Bismarck introduced public pensions to Germany in the 1880s. We do not believe we are supposed to retire and stop working. However, we do encourage clients to save towards financial independence and to focus on the next chapter of life’s journey.
There are more financial ratios to review, and they will be covered in our next blog posting. A closing thought: if we are to give away 10 percent, save 10 percent, and the average tax burden for most American’s is 30 percent, then we should be creating our spending plans with a “True North” of living off of 50 percent of our gross income.