There are quite a few handy financial rules of thumb that can help guide your decisions without needing a detailed analysis. Here are some of the most popular ones:
1. Rule of 72
- Purpose: Estimate the time it takes for an investment to double.
- Formula: Divide 72 by the annual rate of return.
2. Rule of 114
- Purpose: Estimate the time it takes for an investment to triple.
- Formula: Divide 114 by the annual rate of return.
3. Rule of 70
- Purpose: Estimate the time it takes for a population or value to halve with a given annual percentage decrease.
- Formula: Divide 70 by the annual rate of decline.
4. 50/30/20 Rule
- Purpose: Budgeting guideline for managing your after-tax income.
- Formula:
- 50% for needs (housing, utilities, groceries)
- 30% for wants (entertainment, dining out)
- 20% for savings and debt repayment
5. 4% Rule
- Purpose: Determine a safe withdrawal rate from retirement savings.
- Formula: Withdraw 4% of your retirement portfolio annually to ensure it lasts 30 years.
6. 100 Minus Age Rule
- Purpose: Asset allocation for retirement planning.
- Formula: Subtract your age from 100 to determine the percentage of your portfolio that should be in stocks. The rest should be in bonds.
7. Emergency Fund Rule
- Purpose: Ensure you have a financial safety net.
- Formula: Save 3-6 months’ worth of living expenses in an easily accessible account.
8. Debt-to-Income Ratio
- Purpose: Assess your financial health.
- Formula: Your total monthly debt payments divided by your gross monthly income. A good target is below 36%.
9. Home Affordability Rule
- Purpose: Determine how much home you can afford.
- Formula: Aim to spend no more than 2.5 to 3 times your gross annual income on a home purchase.
10. Life Insurance Rule
- Purpose: Estimate how much life insurance you need.
- Formula: 10-12 times your annual income.
These rules of thumb can serve as useful starting points, but it’s important to tailor them to your personal financial situation and goals.
