THE TWO-MINUTE CHECKUP is designed to give users a quick assessment of their finances based on just nine pieces of information, the sort of things most of us know off the top of our heads. There’s no need for users to link their financial accounts, and their personal data aren’t saved on HumbleDollar or anywhere else.
The Checkup started as an Excel spreadsheet built in 2017 by Derek Mayer and HumbleDollar’s editor, Jonathan Clements, for a business venture that never got off the ground. It sat unused until 2022, when Sanjib Saha, a HumbleDollar contributor and software engineer, offered to turn it into a piece of software. James Heaney, the site’s web developer, added the final touches.
A calculator like this is only as good as the assumptions it makes and the logic it uses—and, for some folks, those assumptions and that logic may make no sense. Still, the hope is that the Two-Minute Checkup will provide most users with a slew of helpful feedback in return for inputting minimal information. Here’s a detailed look at how those suggestions are generated:
Financial Fitness. This feedback should be most helpful to users who are still in the workforce. They’re assessed based on the total value of their financial accounts, minus nonmortgage debt, relative to their household’s earned income, meaning the salary or wages from their job. The earned income you input should be your pretax earnings, while financial accounts should include 401(k)s, IRAs, taxable brokerage accounts, bank accounts and so on, unless the money is earmarked for others, such as the funds intended to pay for the kids’ college costs.
What about mortgage debt? That’s obviously important—but it’s ignored in assessing financial fitness on the assumption that mortgage borrowers own a home of equal or greater value, and thus this debt is offset by a significant asset.
Based on users’ financial wealth relative to their income, the Checkup calculates what percentage of their earned income they’ll be able to replace with portfolio withdrawals as of age 65, assuming users continue to amass wealth at the same rate they have in the past. The calculation also assumes that, upon retirement, folks adopt a 4% portfolio withdrawal rate.
Spending. Those who are employed are advised to keep their fixed living costs to 50% of pretax monthly income. Retirees who are age 51 or older are advised to use a 4% or 5% portfolio withdrawal rate. Meanwhile, retirees 50 or younger are suggested a 3% withdrawal rate, reflecting their longer expected retirement.
Investing. The recommended stock allocation falls as a user’s age rises. The allocation is expressed as a range that can be as broad as 20 percentage points—an acknowledgment that personal risk tolerance varies considerably. For instance, at age 64, the suggested range is 50% to 70% stocks. For ages 65 and above, no specific stock recommendation is offered because of the wide disparity in risk tolerance among seniors.
Borrowing. Those who are age 50 or younger, and who are also employed, are advised to limit monthly nonmortgage debt payments to 8% of pretax earned income. This 8% is based on the difference between mortgage lenders’ 28% front-end ratio and the 36% back-end ratio. (See “House,” below.) Meanwhile, if folks are age 51 or older, or if they’re retired or unemployed, they’re encouraged to pay down debt.
House. The calculation assumes a 30-year fixed-rate mortgage at the prevailing interest rate. Mortgage lenders typically assess a household’s ability to borrow using a 28% front-end ratio and a 36% back-end ratio. The 28% ratio only looks at the total mortgage payment—including principal, interest, property taxes and homeowner’s insurance—relative to household income, while the 36% ratio also factors in payments on nonmortgage debt.
To come up with a suggested sum that users might qualify to borrow, the Checkup makes two assumptions. First, it assumes property taxes and homeowner’s insurance premiums will devour 6% of household income, so—if we’re only considering the principal-and-interest payments that a lender might allow—the front-end ratio would be 22% and the back-end ratio would be 30%.
Second, the Checkup assumes nonmortgage debt is incurring a 7% interest rate and being paid down over 10 years. That might be a reasonable assumption if someone has a mix of auto, education and credit card debt. But if someone has lots of high-interest credit-card debt, the Checkup’s assumption could be badly wrong. Based on the 7% interest rate and a 10-year paydown period, those with substantial nonmortgage debt may find the 30% back-end ratio comes into play—and thus the maximum size of a potential mortgage that’s suggested by the Checkup may be less than if only the 22% front-end ratio applied.
College. The college savings recommendations assume those with household incomes of $50,000 or less will receive ample financial aid, those with earned incomes above $50,000 but below $150,001 may get some, and those with household incomes of $150,001 and above will likely get none. These figures will be used for 2022. In subsequent years, to adjust for inflation, the numbers will rise 3% annually. Note that the calculator considers income only and ignores assets. If a family has a large amount of savings, especially in taxable accounts, that could nix all chance of financial aid.
Retirement. The suggested retirement nest egg is based on a 4% withdrawal rate and a goal of replicating half of current household income. That suggested nest egg works out to 12.5 times income. The assumption is that all savings will earn a 4% real (after-inflation) return. This should be a reasonable estimate for those who own a balanced mix of stocks and bonds, but it’ll be too optimistic for those who heavily favor bonds and cash investments.
Financial Emergencies. The recommended emergency fund is based on the risk of losing your job. For those who are working, it’s assumed they need three months of spending money in their emergency fund if their job situation is stable and six months’ worth if their job situation is iffy. It’s also assumed that folks can live off 60% of their pretax income. This works out to 0.15 times pretax annual income for those with stable jobs and 0.3 times annual income for those with iffy employment situations. For couples, the recommended emergency fund is a blend of these two numbers. What if someone is retired? The calculator has a standard $15,000 emergency fund recommendation. This dollar number, set for 2022, will rise in $5,000 increments in subsequent years based on a 3% inflation rate.
Insurance. Disability insurance is recommended for those who are employed. Life insurance is suggested for those who are working and have a spouse, and also for those who have children age 21 and younger. Long-term-care insurance is suggested for those age 51 and older. But these recommendations disappear if your total savings and investments, minus nonmortgage debt, are more than $1.5 million in 2022. In subsequent years, the $1.5 million threshold will rise by 3% to adjust for inflation. The assumption: At that level of wealth, self-insuring is an option. For those worth $1.5 million or more, however, there is one insurance suggestion: Get an umbrella-liability policy.
Estate Planning. All users are advised to get a will, and to check that they have the right beneficiaries on their retirement accounts and life insurance. If they have children age 21 or younger, they’re also advised to name a guardian in their will. In addition, for those age 51 and older, it’s suggested that they draw up powers of attorney.
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