Rule Of Thumb

Filed Under » , ,
Dictionary Says

Definition of 'Rule Of Thumb'

A guideline that provides simplified advice regarding a particular subject. A rule of thumb is a general principle that provides practical instructions for accomplishing or approaching a certain task. Typically, rules of thumb develop as a result of practice and experience rather than scientific research or theory.

Investors may be familiar with a variety of "financial rules of thumb" that are intended to help individuals learn, remember and apply financial guidelines, including those that address methods and procedures for saving, investing and retirement. Although a rule of thumb may be appropriate for a wide audience, it may not apply universally to every individual and unique set of circumstances.
Investopedia Says

Investopedia explains 'Rule Of Thumb'

There are a number of rules of thumb that provide guidance for investors. Well-known financial rules of thumb include:
  • A home purchase should cost less than two and a half years' worth of your income.

  • Always save at least 10% of your take-home income for retirement.

  • Have at least five times' worth your gross salary in life insurance.

  • Pay off your highest-interest credit cards first.

  • The stock market has a long-term average return of 10%.

  • You should have an emergency fund equal to at least three to six months' worth of household expenses.

  • Your age represents the percentage of bonds you should have in your portfolio.

  • Your age subtracted from 100 represents the percentage of stocks you should have in your portfolio.
There are also rules of thumb for determining how much net worth you will need to retire comfortably at a normal retirement age. Here is the calculation that Investopedia uses to determine your net worth:

If you are employed and earning income:
((your age) x (annual household income)) / 10

If you are not earning income or you are a student:
((your age – 27) x (annual household income)) / 10

Articles Of Interest

  1.

    Mortgages: How Much Can You Afford?

    Answering this means number-crunching as well as factoring in other considerations and expenses.

  2. Understanding Credit Card Interest

    Paying these rates can impact your disposable income and your investment returns.

  3. How Mortgage Refinancing Affects Your Net Worth

    Find out how to determine whether refinancing will put you ahead or even more behind.

  4. Top 10 Tips For A Financially Safe Retirement

    You've worked hard to secure enough to retire, so make sure you keep it safe.

  5. How Risk Free Is The Risk-Free Rate Of Return?

    This rate is rarely questioned - unless the economy falls into disarray.

  6. Top 4 Most Scandalous Insider Trading Debacles

    Here we look at some of the landmark incidents of insider trading.

  7. Nobel Winners Are Economic Prizes

    Before you try to profit from their theories, you should learn about the creators themselves.

  8. The Copper King: An Empire Built On Manipulation

    Find out how Yasuo Hamanaka's actions in the copper market forever changed the rules for commodity traders.

  9. 7 Controversial Investing Theories

    We take a closer look at the theories that attempt to explain and influence the market.

  10. Breaking Down The Geometric Mean

    Understanding portfolio performance, whether for a self-managed, discretionary portfolio or a non-discretionary portfolio, is vital to determining whether the portfolio strategy is working or ...
comments powered by Disqus
Marketplace
Hot Definitions

  1. Racketeering

    Racketeering refers to criminal activity that is performed to benefit an organization such as a crime syndicate. Examples of racketeering activity include...

  2. Lawful Money

    Any form of currency issued by the United States Treasury and not the Federal Reserve System, including gold and silver coins, Treasury notes, and Treasury bonds. Lawful money stands in contrast to fiat money, to which the government assigns value although it has no intrinsic value of its own and is not backed by reserves.

  3. Fast Market Rule

    A rule in the United Kingdom that permits market makers to trade outside quoted ranges, when an exchange determines that market movements are so sharp that quotes cannot be kept current.

  4. Absorption Rate

    The rate at which available homes are sold in a specific real estate market during a given time period.

  5. Yellow Sheets

    A United States bulletin that provides updated bid and ask prices as well as other information on over-the-counter (OTC) corporate bonds...

  6. Bailment

    The contractual transfer of possession of assets or property for a specific objective.
Trading Center