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 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
A rule-of-thumb for calculating the amount of debt that can be ...
A rule of thumb used to determine the amount of funds to withdraw ...
The amount by which assets exceed liabilities. Net worth is a ...
A protection against the loss of income that would result if ...
A grouping of financial assets such as stocks, bonds and cash ...
The endowment effect describes a circumstance in which an individual ...
SavingsYou've worked hard to secure enough to retire, so make sure you keep it safe.
Credit & LoansFind out how to determine whether refinancing will put you ahead or even more behind.
BudgetingAnswering this means number-crunching as well as factoring in other considerations and expenses.
RetirementPaying these rates can impact your disposable income and your investment returns.
InvestingModified adjusted gross income, or MAGI, is one aspect of a person’s income that is calculated while preparing a tax return.
Fundamental AnalysisPaid-Up Capital is listed in the equity section of the balance sheet. It represents the amount of money shareholders have paid into the company by purchasing shares. It’s essentially two accounts, ...
Fundamental AnalysisCash flow from operating activities is a section of the Statement of Cash Flows that is included in a company’s financial statements after the balance sheet and income statements.
ProfessionalsSWOT stands for Strengths, Weaknesses, Opportunities, and Threats. SWOT analysis is a management tool used to identify strategies for success. It may be used to guide individual thinking, group ...
EconomicsCountries with limited governments have fewer laws about what individuals and businesses can and can’t do. What's the net result?
Investing BasicsGoodwill is a bit of a paradox--intangible, yet it is recorded as an asset on the purchasing company's balance sheet.