I came across a good and entertaining blog post recently debunking some common financial rules of thumb. Len Penzo’s article is both funny and does a good job of pointing out the flaws in some financial rules that people often take as fact.
The article got me thinking about why people often use rules of thumb in their lives, especially when managing their finances. By definition, a rule of thumb is a general or approximate principal based on experience as opposed to a specific calculation. In other words, it is a shortcut that is based on what is to be considered an “average” situation. I think the attractiveness of these rules is that they are simple and easy to understand and apply. The rub of course is that everyone’s situation is unique, and applying these rules can often lead to inaccurate conclusions and poor decisions.
Rules of thumb may be generally accurate, or a good starting point, but they are in no way a substitute for a detailed, and personalized financial plan that is designed around your specific goals and current situation.
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