I often rail against “financial rules of thumb” for their overly simplistic view of what are often complex situations. There is far too much potential for snappy catchphrases to lead people to refuse to think and evaluate situations on their own. Rules of thumb don’t take into account individual circumstances and even the most popular ones are simply incorrect.
Kiplinger asks about the usefulness of twelve financial rules of thumb, particularly when some can be harmful if blindly followed. What do you think? Which “rules” are true and which are false?
# You should always close credit card accounts you no longer use. (See How to Best Handle Old Credit Card Accounts.)
# Save and set aside an emergency “rainy day” fund to cover at least three months’ worth of your expenses. (See Always Be Prepared: The Unexpected Job Loss.)
# The percentage of stock in your portfolio should equal 100 minus your age.
# Always go with a fixed-rate mortgage — especially when interest rates are rising.
# Save 10% of your income each year.
# Buying a car is always cheaper than leasing.
# A Roth IRA is better than a traditional IRA.
# Never buy a house that costs more than 2.5 times your annual income.
# Make sure your own retirement savings are on track before you save for your kids’ college education.
# If you carry a balance, you want a credit card with a low interest rate.
# If you need life insurance to protect your family, your coverage should equal eight to 12 times your annual income.
# With a nest egg of $1 million, you can retire comfortably. (See Does This Number Impress You?)
Published or updated January 11, 2008.