If you have been reading finance and investing blogs than you have come across some financial and investment rules of thumb. These are often referred to and used as guidelines and not as set in stone laws, some are useful while other’s are … well not so useful. We have discussed some investing rules in our Investing Tips article, but the following is a comprehensive list of investing and financial rules, if we left any out feel free to add them in the comments.
- Reduce Debt. If you have debt, saving/investing will become harder. First order of business reduce your debt load.
- Save and Invest 10% of Your Pre-Tax Income. “How much should I save?” The most common question I see on blogs and forums. Before you start spending your hard earned money Pay Yourself First! 10% is often used as a guideline, I like 10% but you should aim for 20%!
- Don’t Time The Market. Unless you have years of experience and education along with a lot of free time, don’t time the markets! Market timing is not a sound investment strategy, buy and hold -> invest for the long term and ignore short-term fluctuations.
- Rule of 72. The Rule of 72 states that you can divide the number 72 by whatever yield you are getting to see how long it would take for your investment to double. You can also switch the formula and divide 72 by the number of years you want your money doubled to see what yield you need.
- 100 Minus Your Age Rule. This rule is used for asset allocation, the rule of thumb is to take your age and subtract it from 100. That is your percentage of stock allocation. I am not a big fan of this rule as man other factors also contribute to your asset allocation.
- 3-6 Months Emergency Fund. Emergency fund’s are sometimes the most overlooked items in financial planning, yet they are vital. The general rule is to save 3-6 months worth of expenses in a highly liquid savings account to ensure it is available during an emergency.
- Asset Allocation-Efficient Frontier. Diversification is a basic investing concept, diversify among different asset classes to ensure best returns, asset allocation. According to the Efficient Frontier we get the best results when we have a mix of fixed income securities and equities.
- 10, 5, 3 Rule. This is a neat little rule that states that you can expect return of 10% from equities, 5% return from bonds and 3% return on highly liquid cash and cash-like accounts. Of course this is over the long term, currently you’d be like if you can earn 2% on your savings account. Personal Dividends has more on 10-5-3 Rule.
- 4% Withdrawal Rule. How much should I withdraw during retirement? We often use the 4% rule to protect the principle and determine how much one can take from the retirement savings. Four Pillars offers an excellent explanation of how the 4% rule works.
From Twitter Followers:
@Matt_SF If you can’t/won’t invest an hour per week researching your stocks, stick to index funds. The rewards aren’t worth the risk. Never buy stocks on margin. Borrowing money to invest in the stock market is moronic at best. [Stead Fast Finance]
What are your financial or investment rules of thumb? Which do you find most useful? Any rules of thumb do you hate?