How Useful Are Financial Rules of Thumb?

Financial rules of thumb are designed to give you quick guidelines. However, you shouldn’t follow them without giving some thought to your personal circumstances. Some of the more common financial rules of thumb include: Save 10% of your gross income. While this will give you a good start, it’s typically the minimum you should be saving. Analyze your financial goals, and then decide how much to save every year. Plan on spending 80% of your preretirement income during retirement. This may be true if you don’t plan to be very active, but more people expect retirement to include expensive travel and hobbies. On the other hand, if you’ve paid off your mortgage and your children’s college, you may need less than this. Set the percentage of stocks in your portfolio to 100 minus your age. With increased life expectancies, this can result in your portfolio being too heavily weighted in low-yielding investments. Set your asset allocation based on your risk tolerance and time horizon for investing. Keep three to six months of income in an emergency fund. How much to keep in that fund will depend on your circumstances. You may need a large reserve if you are the sole wage earner in the family, work at a seasonal job, own your own company, or rely on commissions or bonuses. A smaller reserve may be required if you have more than one source of income or carry insurance to cover many emergencies. Pay no more than 20% of your take-home pay toward short-term deb ...

Want to read more?

Subscribe today!

Learn how to email this article to others