There’s no straightforward answer when it comes to knowing how you should manage your money, but applying some simple money habits can help ensure you save adequately for your retirement, build a pot of wealth for your future life goals, and keep you out of debt.
Here are my favourite four rules for managing your money when it comes to pension planning, budgeting and investing.
1. How much money should I invest? The ‘Rule of 72’ to double your money
There’s no point in trying to time the market to make significant gains on the stock market, even if it is tempting to do so.
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The best and worst days are often very close, and by trying to time your trades based on predictions is very risky and you could lose money fast.
The best strategy is to invest consistently each month so you can take advantage of lows and enjoy the highs, known as pound cost averaging.
But, if you want to double your money, take a look at the ‘Rule of 72’, which helps you work out how much you would need to invest to double your wealth. Here’s how it works:
Take the estimated rate of return on your investments. Then, divide 72 by this figure. If the estimated return on your investment is 8% then it’s 72÷8 = 9. Using the rule of 72, it means it would take you nine years to double your money with that rate of return.
The higher your return, the faster you can get there.
If you invested £10,000 at 30, and your average return was 8%, it is estimated you will have around £20,000 before 40.
You can use this rule for cash savings too, but as interest rates fall, it could take longer to achieve your goals.
This rule was originally introduced by mathematician Luca Pacioli in the 1400s, but is still popular today to help work out the concept of building wealth.
Of course, investing has downs as well as ups, and this is why it is important your investing strategy should include investing a consistent amount each month, and keep going even if there is market turmoil – like what we have seen recently as Donald Trump’s tariffs came into play. See the latest on the recent market turmoil in our live blog.
2. 50/30/20 budgeting rule
If you’re worried about running out of money each month, give this rule a try. Known as the 50/30/20 budgeting rule, it splits your monthly income into various pots for spending and saving.
Here’s how it works.
- 50% of your income goes into essential spending – like bills, travel costs to work, groceries and so on.
- 20% goes towards savings and investments – or to clear debt.
- 30% goes towards ‘wants’ – this is money you allocate to spending on things like take-aways, clothes, going out and so on.
You can mix the rule up, so maybe if you’re looking to save more, you may decide to put 30% of your monthly income into savings or investments – or more. You decide.
The 50/30/20 was originally introduced by professor and US senator, Elizabeth Warren.
3. The 4% pension rule – retire comfortably
No one wants to run out of money when they retire, and the 4% pension rule can help ensure you don’t.
The idea is you withdraw only 4% of your pension in the first year of retirement and then increase withdrawals each year at the same rate as inflation. The idea is to make your pension pot last longer, for at least 30 years.
By keeping a significant sum still invested, your money can keep growing as you are withdrawing just enough to live on.
This idea originated from a US financial planner, Willian Bengen, in the 1990s.
But, like any rule, make sure it is right for you. Your circumstances may mean you withdraw more, or less. Morningstar’s analysis suggests 3% is adequate. But you may decide to withdraw more to cover unexpected costs or because you are facing ill health, for example.
Using historical data, research from Fidelity shows that if you had a £100,000 pension pot in 2015, withdrew 4% and then only withdrew at the rate of inflation, you would still have £189,000 remaining after 10 years – nearly double the starting amount.
You can read more about the 4% pension rule in our article: The 4% pension rule to retire comfortably.
4. How much should I save into a pension? The half your age rule
If you’re not retiring yet, then you may be asking ‘how much should I save into a pension’. There’s a rule for that too.
The simple principle here is to contribute half your age into a pension to achieve a comfortable retirement pot. So, if you’re 40, look to stash 20% of your salary into a pension each month,
This sounds hefty, but this should include your employer’s contribution and any tax incentives.
The younger you start on pensions, the easier it is to achieve your pension goals.
See how your pension savings compare to your peers in our “average pension pot by age” guide.
