Why investing rules of thumb don't always work

Some might be outdated, others no longer practical.

Ruth Saldanha 16 November, 2018 | 6:00PM

Rules of thumb are intended as guidelines. They are not exact directions, but a rough estimate of what you might need. There are several rules of thumb in investing as well, which are often interpreted in multiple ways.

For example, a rule of thumb for budgeting is the 50-20-30 rule that says that 50% of your income should be used for necessities, 20% should go toward long-term goals, and 30% toward things you want. However, some people swap the last two while others reject them altogether. In fact, advocates of the F.I.R.E. (financial independence, retire early) movement sometime recommend saving over 70% of your income toward long-term goals!

Similarly, another rule of thumb states that your entire student debt should not be more than your first year’s salary -- but with rising tuition costs, this rule may not be feasible for many.

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Ruth Saldanha  Ruth Saldanha is Senior Editor at Morningstar.ca