People will often says “don’t put all your eggs in one basket”, or “take on more risk when you’re young, less as you get older”. Which is great advice, but how do you make that work for you?
That’s why I like the rule of 100. The idea is you subtract your age from 100, and the number that’s left is how much you should put into growth, or riskier investments, like shares or property. So for me at 31, the suggestion is 69 per cent growth.
Taking a bit of risk is important if you want to build your wealth, but the problem is you need the time to make it work for you.
You also don’t want to be an egg with absolutely nothing stashed safely in your savings account when the unexpected happens.
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That’s why this rule is so helpful. It shows how the balance changes as we get older, and are more likely to use the money we’ve put the hard work into building up.
Listen to the podcast on the topic below:
So as you hit 65, they idea is you’ll have 35 per cent in riskier growth investments, and 65 per cent in safer savings.
Why not 100 per cent, though? You’re about to hit retirement, so surely you want to be safe and secure as houses?
Well these days you could well have 30 years in retirement. How do you make that nest egg last 30 years? By not having all your eggs in one basket. A little bit of it in shares or property means you can keep earning, while still using the majority of it to finally take the retirement trip. In an ideal world it’s a sliding scale, and as you get older you just keep slipping along towards the more conservative end. Are we talking money or life in general now? I don’t know anymore.
But here’s the thing with the rule of 100. It’s only useful as a general idea, that you then apply to your own personal situation.
To go back to myself, I have more than 70 per cent of my money in property or shares at the moment. I’m what you refer to as an “aggressive” investor. I like risk. I’m also a young homeowner, and the current high house prices can throw these ratios out of whack.
Other people might want just the opposite.
So at the risk of telling you how to suck eggs, remember that general rules of thumb are a useful place to start. Then you need to think how it applies to your own life.
Listen to other episodes in the series:
Episode 1: Buy v rent
Episode 2: Saving for a deposit
Episode 3: Negotiating a mortgage
Episode 4: The power of location
Episode 5: Tricks for paying off the mortgage faster
Episode 6: How to crush the debt
Episode 7: Apartment v house
Episode 8: Renovate or detonate?
Episode 9: How to solve land headaches
Episode 10: Is now the time to get nervous about your KiwiSaver?
Episode 11: How to house hack your way to smaller household bills
Episode 12: The tough talk you need to have when saving for a house
Episode 13: Is NZ ready for first-home buyer landlords?
- Frances Cook is the host of the personal finance podcast Cooking the Books. She is not a financial adviser, and all information is general in nature. For individual advice, see a financial adviser. Listen to her podcast on OneRoof.co.nz
