Rules of thumb are great little guidelines when you’re talking to large groups of people. A perfect example is the “rule” that you should have “1.5 times your annual salary by age 35″ described in the recent retirement checklist from CNNMoney.
If you’re in that age group, you can read that rule of thumb and quickly compare your current retirement savings to get a general idea of what kind of shape you’re. If you have $5,000 and you make $35,000 a year, you might be panicked enough to start beefing up your retirement savings. If you’ve make $35,000 a year and you’ve got $100,000 socked away, you’ll probably feel that you’re ahead of the game.
There’s just one problem
Your situation might be completely different.
What if you’re 35 and make $35,000 a year, but you’ll be inheriting money when you turn 40 because your Great Aunt Molly left you $500,000 that’s being held for you in trust? Or what if you’ve got $100,000 socked away, but you want to retire at age 40, and most people in your family live to be 100? The rule of thumb isn’t going to apply to you.
That’s because — as the Rules of Thumb site points out — a rule of thumb is essentially “an easy-to-remember guide that falls somewhere between a mathematical formula and a shot in the dark.” They’re useful, but they aren’t 100% accurate for everyone.
Take them as a signal
When you hear a rule of thumb, take that as a signal to think, and to examine your own individual situation in detail. Your individual wants, needs, and circumstances can make huge differences — and I don’t just mean when it comes to retirement either. That’s just one example.
Another example is the rule of thumb that you “shouldn’t pay off your mortgage because of the tax deduction”. We don’t get a tax deduction for our mortgage, so hanging on to our mortgage for the non-existent deduction would have been dumb.
Remember that rules of thumb are great for getting you thinking, but they shouldn’t rule your wallet.
Can you think of any other financial rules of thumb? Do they apply in your situation?Posted in Money Management on 10.15.12 with 2 comments.