Rule of Thumb

Posted in Finance, Accounting and Economics Terms, Total Reads: 3786

Definition: Rule of Thumb

There are a variety of “financial rules of thumbs” in order to help the investors to apply financial theory to practical applications. These include rules that address methods and procedures for to save, invest and retire. Rule of thumbs are might be applicable to a wide audience, at the individual level and under unique circumstances, it might not be useful or applicable at all.

Example: There are a number of financial rules of thumb which provide guidelines to the individual investors. Some of them are as follows –

  1. the number you get after subtracting your age from 100 is the percentage of stocks you should have in your portfolio
  2. one should maintain an emergency fund equal to a minimum of three to six months of household expenses
  3. a minimum of 10% of take-home income should be saved for retirement
  4. pay off credit cards with highest interest rates
  5. the long term average return of the stock market is 10%
  6. the age of an individual represents the percentage of bonds he should have in his portfolio

Hence, this concludes the definition of Rule of Thumb along with its overview.

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