Rule of Thumb

A rule of thumb is a general guideline or principle that is based on common sense and experience, rather than on scientific evidence. Rules of thumb are often used in financial planning to help people make decisions about how to save, invest, and spend their money.

One common rule of thumb is the 50/30/20 rule. This rule suggests that you should allocate 50% of your income to needs, 30% to wants, and 20% to savings. Needs include things like housing, food, and transportation. Wants include things like entertainment, travel, and clothes. Savings can be used for anything you want, but it is often recommended to use it for retirement, emergencies, or other long-term goals.

Another common rule of thumb is the 72 rule. This rule can be used to estimate how long it will take for an investment to double in value. To use the 72 rule, simply divide 72 by the interest rate of your investment. For example, if your investment is earning 8% interest, it will take about 9 years to double in value.

Rules of thumb are not perfect, and they should not be used as the sole basis for making financial decisions. However, they can be a helpful starting point for people who are new to financial planning.