Investing and Money Rules of Thumb

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.

From Twitter Followers:

@RetSav -Failing to have a concrete investment plan is planning to fail. Only buying or investing in what you know[Retirement Savior]

@MyLifeROI I don’t invest in things I don’t understand. And I look for sound fundamentals… not hype or flashiness. [My Life ROI]

@ObliviousInvest Minimize costs is my mantra. (one of ‘em anyway). [The Oblivious Investor]

@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]

@brokeinthecity For individual stocks or riskier indexes: Never put in more than you can afford to lose. I prefer index funds, bonds. [Fabulously Broke]

@BudgetPulse Invest for the long term, don’t look for the short gain. [Budget Pulse]

@arohan Rule #1 Don’t lose money! I am sure you got it though. [Arohan Value]

@MoneyMatters money rule of thumb – don’t invest in anything you don’t understand. [Bible Money Matters]

@JoeTaxpayerBlog “with reward comes risk” No one can “guarantee” a return well above 1 yr T-bills without adding risk. [Joe Taxpayer]

@SChronicle Never use a fund that has a record of any less than five years. You can see how it performed it different types of markets. [Savings Chronicle]

@B4UInvest Best advice/rule: Always check an adviser’s registration! [Before You Invest]

@NvincibleLiving My number 1 money rule is simple: If you can conquer impulse spending and instant gratification, then you can do anything!! [Invincible Living]

What are your financial or investment rules of thumb? Which do you find most useful? Any rules of thumb do you hate?

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Comments

  1. says

    When you read about a great stock some hotshot has invested in, don’t buy. Sell. By the time they are talking about it in public, the stock is close to its high price and has nowhere to go but down. There are exceptions, but not many.

  2. says

    Similar to David’s comment I believe in the Pessimistic attitude: If Somebody is promising quick returns with low risk, run! It’s the standard analogy it’s a marathon not a sprint. Took me 35 years to realize that unfortunately. :-).

  3. says

    Thanks for the mention and thanks to everyone else for the great ideas.

    Cheers,

    Kent

  4. says

    I agree with Paul, no such thing as quick returns. Thanks for the mention.

  5. says

    Excellent article. Investors need to do their due diligence when investing. We manage 3 “Mortgage Investment Corporations” that have yielded between 7.5% -14% since 1994. There are other quality investments avaiable if you do the research. Make $50,000 and spend $45,000= bliss, make $50,000 and spend $55,000=misery

  6. says

    Thanks everyone. Really good stuff. I greatly appreciate the detail. After reading this, we’ll have to think more about it.

  7. says

    captivating post. I usually find myself just scanning a post and not reading it. Thank you for passing on your knowledge.

Trackbacks

  1. [...] Just following those five steps you will be able to dramatically simplify your investment portfolio, as I mentioned at the beginning there is no magic to investing, just keep things simple and follow some investing rules of thumb. [...]

  2. [...] 5 Investment Articles are: Investing and Money Rules of Thumb Compounding Interest: Best Investment Strategy -Invest Early Gold – Bad Investment: 3 Reasons why [...]

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