A  principle is a rule, and pollex is an obscure term for thumb.  Therefore, we’re talking about Rules of Thumb.) I like rules of thumb, as a rule of thumb… I think we all want for most difficult issues in our lives to be boiled down to a simple, easy to understand statement.  These rules are everywhere, all around us, cropping up more and more every day.  Heck, there’s even a whole website dedicated to rules of thumb, where you can find rules on all kinds of subjects, as diverse as how to outrun a crocodile to changing your answers on a test. With the popularity of rules of thumb in mind, I wanted to address a few financial rules of thumb that you see pretty regularly – and assess whether they’re useful or not…  This may become a somewhat regular feature. Today we’ll start off with an age-old rule:

Save 10% of Your Income

Let’s start with one of the basics you see all over the place:  Save 10% of your income.  Like most all rules of thumb, this one is very general in nature, and likely doesn’t apply to much of anyone in particular – but it does provide a good starting point.  This starting point is best for someone starting the savings process at an early age – perhaps in your twenties or thirties.  If you started to save 10% of your income at that point and kept up the habit over your lifetime, you’d be bound to have a significant sum of money put aside when retirement comes.  (You might be interested to note that this particular rule of thumb is one of the base recommendations in the book “The Richest Man in Babylon” which I wrote a summary of some time ago.) The problem is that many folks don’t start early in life, and by the time they get around to saving in earnest (maybe in their forties), 10% savings will likely be woefully inadequate – 25% to 30% may be more appropriate. The other, likely bigger problem with the 10% rule is that it doesn’t account for your timeline or the purpose or goal for the savings.  The assumption is that you have a long timeline, meaning 30 or more years, and that your goal is retirement at some poorly-defined rate of income, such as 80% of pre-retirement income (see below).  These two assumptions aren’t likely to fit everyone – although they could fit some people in general, your mileage may vary, quite a bit.  If your timeline is shorter (say 10 to 15 years) or your goal is for a higher retirement income your percentage of savings should be higher, possibly much higher.  If your goal is something altogether different, like a downpayment on a home (in a short timeline but of a specific, small-ish amount), 10% would be too much – although you will likely benefit on other goals by saving at least 10% at any time. So, for a starting point, for someone with a relatively long timeline and a vague goal to aim for, 10% isn’t bad.  Start with this and adjust upward over time.  It’s better than no rule at all, in my opinion. Let me know if you have a particular rule of thumb that you’d like me to feature – you can leave a comment below or use one of the other methods to get to me (listed on the right side of the page).

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