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
- Don’t borrow more than your annual earnings.
- Never co-sign a loan.
- Avoid paying interest on anything that loses value.
- Pay your highest interest rate credit cards first.
- If you carry a balance on a credit card, look for the lowest rate.
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
- Aim to replace 80% of pre-retirement income.
- You should aim to save 20 times your annual income.
- Save for your own retirement before saving for your children’s education.
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?
