I always thought that the term “rule of thumb” originated from British common law in the 1600’s that allowed a man to beat his wife with a stick provided that the diameter was not greater than the width of his thumb.  Now I understand that this reference is just a myth.

A rule of thumb provides general guidance for determining behavior.  Here are a few rules of thumb for money.

Budgeting

  • Pay yourself first.
  • Put 10% of your income into savings, 10% to charity and spend the rest.
  • Bank your raises.
  • Keep an emergency fund of 3 to 6 months worth of expenses.

Debts

Investing

  • Buy low – sell high.
  • Always take an employer match.
  • Don’t invest in a stock unless you understand the business that the company is in (thanks Warren Buffett).
  • 100 minus your age is the percentage you should invest in stocks.
  • The stock market averages about a 10% return.
  • To determine how long it will take an investment to double, divide 72 by the annual return (known as the rule of 72).

Life Insurance

  • Buy a life insurance policy worth 6 to 10 times your gross annual income.

Retirement savings

My favourite rule of thumb for money is:  No one cares as much about your money as you do.

Even thought this one has nothing to do with money I still love it:  To avoid lunatics on a city bus, sit in the middle.  The friendly lunatics sit as close to the driver as they can and the unfriendly ones sit as far away as they can.

You hear or read about these maxims all the time, but they are rules of thumb – not set in stone rules.  You may not necessarily agree with any or all of them but they can be benchmarks.

What are some of your favourite rules of thumb for money?

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12 Comments

  1. Alanna on October 6, 2011 at 8:37 am

    Well done! Very clear and concise. This is a great list of things to think about for well managed personal finance.

  2. krantcents on October 6, 2011 at 8:38 am

    Good points, I think I follow every one of them.

  3. Ashley @ Everything Finance on October 6, 2011 at 5:10 pm

    I think the 25% of your income on housing is one of my favorite rules of thumb. A lot of people over spend on housing.

    • Boomer on October 7, 2011 at 5:49 pm

      @Ashley: That’s a good one. I’ve also heard percentages up to 30% on total housing costs, including taxes and heating.
      Also regarding housing there’s
      – your mortgage balance should be no more than twice your family annual income
      -the value of your house should be no more than two to three times your family income. (This is a tough one. If I went with this rule I’d be living in a play house.)

  4. FrugalGremlin on October 7, 2011 at 2:24 pm

    Interesting list! Some stuff just seems like common sense even though im sure the majority of people don’t do it. I would be interested to know how many people actually donate 10% of their income to charity ($416/month on a $50 000 income. Christians are obligated to donate 10% but I dont imagine many others do

    • Boomer on October 7, 2011 at 5:54 pm

      @FrugalGremlin: I would suggest that not many people do them or even agree with them, but as I said they can be good benchmarks.
      It’s interesting to note that people who earn less than $30K a year tend to give closer to 10% of their income as compared to people who earn more than $100K who give less than 1%.

  5. The Wealthy Canadian on October 8, 2011 at 10:17 am

    Great job Boomer, some timeless advice indeed.

    In particular, I think saving a minimum of 10% by paying yourself first so to speak, along with aiming high in replacing one’s pre-retirement income (such as the 80% you mention) are exceptional points to keep in mind.

    As you mention, no one is going to care for your money and financial objectives as much as you do.

    I like your comment about the bus! 🙂 I used to stay close to the front; that way, in the case somebody went bonkers, I would be closest to the door!

    Have a great weekend and happy Thanksgiving.

    All the best,
    TWC

  6. Grady Pruitt on October 8, 2011 at 1:40 pm

    These are All some excellent suggestions on finances. Just the first two sections can put you well on your way to success.

    Thanks for sharing!

  7. Julie Gaudet on October 9, 2011 at 7:08 am

    My favorite “rule of thumb” is to put money aside from every pay cheque for your education… not that of your kids but YOUR education. I am a big believer in continuing your education long into your life. If you are not growing you are dying. My grand-father was in his 60’s. I will never forget this lesson and vowed early in life to make learning a priority. Who knows how many different careers I will have in my lifetime… already building on my second!

    • Boomer on October 10, 2011 at 1:54 pm

      @Julie Gaudet: I like the idea of saving for your education. I have always put aside some money to take courses and buy books on topics that interest me. I don’t anticipate a new career, but I like learning new things, I have new interests all the time and I believe you should never stop learning.

  8. Mikhaila on October 13, 2011 at 9:43 pm

    I just added the site to my rss so I’m a litte late on this poser, but I wanted to say these are fantastic. They’re simple and relatively easy to follow (if you’re willing to put in the effort).

    I wanted to add to the bus point: ALWAYS wear headphones, no matter where you sit. I constantly wear mine and most of the time I don’t even have any music on; I just want to deter the lunatics.

  9. Lokoyen on July 6, 2012 at 5:11 pm

    I like the Rule of Thumb for Autos of that the TOTAL value of vehicles should not exceed half of annual household income.

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