The following rules of thumb may work for some people. But they do not make financial sense for everyone. Whatís important is to be able to know whether a rule suits your situation. Here are some of those rules, and some considerations that should not be overlooked.
"Your life insurance should equal five times your yearly salary." This rule of thumb has been used to answer the question: How much life insurance should I have? The ideal amount of life insurance is the amount that will, when invested, generate enough income to allow your survivors to maintain the level of income they are used to. "Five times your salary" will accomplish this objective in some cases, but there is no substitute for making the calculations necessary to find out how much life insurance you in particular need to buy. The amount you need will depend on how many people there are in your family, whether there are other sources of income besides your salary, how old your children are, and other factors.
Save 10% of your salary per year. You may need to save much more than ten percent of your gross income to have a comfortable retirement. The amount you need to save for retirement depends on how large your existing nest egg is and how old you are. Those who started saving late in lifeóin their 40sóneed to save at least 15 or 20% per year.
Contribute as much as you can to retirement plans. This makes sense for most people, but if youíve accumulated a large amount of money in a retirement planóclose to a million dollarsóyou may reach the point where the negatives of contributing to your retirement plan savings outweigh the positives.
You need 80% of your pre-retirement income to retire comfortably. Although people may need 80% of your salary during the first few years of retirement, later on they are often able to live comfortably on less. The amount of income you need depends on whether you have paid off your mortgage, whether you will have other sources of retirement income, and on other factors.
Subtract your age from 100, and invest that percentage in stocks. This is one of those "cookie cutter" rules that only pans out for certain investors. For others, it results in a portfolio that is much too conservative. The best method of allocating your investments among various types of investments depends on your investment goals and needs, and your willingness to risk your capital. In this case, rules of thumb do not serve the investor at all.
Maintain an emergency fund of six monthsí worth of expenses. Depending on your familyís situation, three monthsí worth of expenses might be enough of an emergency fund; or six monthsí worth might be totally inadequate. The amount you should keep on hand depends on how easy it would be for you to take out a short term loan, and how much money you have in savings and investments, among other things.
Tip: Do not rely on any rule of thumb to make financial decisions. Instead consider carefully what your needs and goals are, and calculate what youíll need to do to fulfill them.