![]() It's certainly one of the most prevalent. (And if you want to build in a safety margin, base your future needs on 110% of your current spending.)Īs I mentioned last week, another rule of thumb that makes me cranky is this common guideline espoused by all sectors of the homebuying industry: “Buy as much home as you can afford.” No no no no no! Of all financial rules of thumb, this is probably the worst. Use 100% of your current expenses to calculate your retirement spending. I think a better rule of thumb for determining retirement needs is this: When estimating how much you'll need to save for retirement, assume you'll spend as much in the future as you do now. Your spending reflects your lifestyle your income doesn't. Instead of estimating your retirement needs from your income, it makes far more sense to base them on spending. Let's look at three things I think conventional wisdom gets wrong (and what I believe are better alternatives).įor instance, I get frustrated when I hear financial advisers push the idea that you should base your retirement savings on 70% of your income. In the past, you've probably seen my rant about some of my most-hated financial rules of thumb. Most are handy, but some common guidelines do more harm than good. The trick, of course, is knowing which rules of thumb to use. That's what rules of thumb are all about! I have some engineer friends who'd get tense at this sort of sloppy guesswork, but most of the rest of us are happy to trade a bit of precision for speed. But they're true enough for us to make loose plans based on them. ![]() Financial rules of thumb don't always hold true. It doesn't give an exact answer but a ballpark figure. Like all rules of thumb, the rule of 72 isn't precise. But if you were able to earn 12% on your investment, that money would double in six years. If your savings account yields 4%, say, it will take about 18 years for your nest egg to increase by 100%. This shortcut says that if you divide 72 by a particular rate of return, you'll get the number of years it'll take to double your money. You've probably heard of the “rule of 72”, for example. In these cases, it's nice to have some rough guidelines you can rely on. ![]() You don't always have time (or want to take the time) to create elaborate spreadsheets when choosing a course of action. After twelve years of reading and writing about money, I've come to love financial rules of thumb.įinancial rules of thumb provide helpful shortcuts for making quick calculations and decisions.
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