A rule of thumb is a simple yet practical approach to any particular subject or course of action. It is a basic rule-set that gives practical instructions to accomplish a certain task. They have been developed through practice and experience and are not merely a result of any scientific research or theoretical foundation. Several rules of thumb exist to approach financial planning. Some of them are mentioned below for you to give a try.
1. The 50/ 30/ 20 Rule
This rule is popularly used for budgeting and is one of the most common ones among the other budgeting rules of thumb. The rule says that out of your net income you should spend 50% of it on your necessities such as household expenditure and bills; 30% on your personal wants, like entertainment or food, and 20%on financial goals, like saving or investments.
This budget strategy would work the best for you if you are not sure about how to start with a budget. This will help you break down your budget into basic categories and will thus help you create a balance between obligations, goals and splurges.
2. The 20/ 4/ 10 Rule
The 20/4/10 rule of thumb is applied when someone is planning to buy a car in future. This helps shop for a vehicle that would fit your budget. The rule is to make a 20% down payment on a four-year car loan and spend no more than 10% of your monthly income on transportation expenses. This rule would keep you from buying more vehicles than you can actually afford or from buying an expensive vehicle.20/ 4 / 10 rules brings into consideration the costs of maintaining a vehicle and helps you keep a check on your car expenses.
3. The age rule for stocks
This rule states that the older you get the less risky investments you should make. Stocks are more risky than bonds, so according to the rule you should avoid investing in stocks as you age. To put a number on it, subtract your age from 120 (the old rule was 100, but many experts now say 120 makes more sense); that’s the percentage of your portfolio that should be invested in stocks. The above rule gives you a general idea of what your asset allocation should look like, based on your age.
4. The 6-month emergency fund rule
The rule means that you should try and keep at least 6 months’ worth savings in case you are met with an emergency. But the rule makes more sense for people who are earning enough money to save a considerable amount of their income. For younsgsters or people with a financial burden or costs, this rule is not reliable and practical. But there is no rule on how much one should save so everyone should try to save as much amount as they can after covering all their expenses.
These are not the only rules of thumb that exist when it comes to financial planning or investments but these are the most popular ones. You can research about the one that interest you and start with a small step towards being practical and smart in your financial planning.