How Useful Are Financial Rules of Thumb?
These guidelines are often touted as gospel truth. Do they point you in the right direction -- or lead you astray? Take our quiz to find out.
By Kimberly Lankford, Contributing Editor, Kiplinger's Personal Finance
Erin Burt, Contributing Editor, Kiplinger.com
January 3, 2008
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Making financial decisions often involves a lot of "on the one hand, on the other hand." But sometimes you just want a fast answer -- a simple guideline to point you in the right direction.
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That's where rules of thumb come in: They aim to break down a complex financial choice into a quick one-liner. You know, "Never spend more than 36% of your income on housing," for example, or "pay off debt with the highest interest rate first."
They may be touted as gospel truth, but when it comes to money rules of thumb, some are more helpful than others. Many are time-tested words of wisdom that set you on the right path. Others are downright wrong and could wind up costing you, no matter how well-meaning the giver of advice. The misleading guidelines may be outdated, impractical or simply a misunderstanding. The trick is evaluating these oft-quoted principles to see if they make sense for your personal situation.
Just how useful are the financial rules of thumb? We've pulled together a QUIZ to see if you can sort the most truthful advice from the misleading.
Of course, the one solid rule of thumb you can count on is that there is no one-size-fits-all answer to most financial decisions. But if you can zero in on the best rules of thumb, you're one step closer to making good choices with your money.
TAKE OUR QUIZ: Financial Truth or Bunk?
Reader Comments (5)
Posted by: jason brand at 01/03/2008 02:12:09 PM
...Question 4 is wrong: You should NEVER take an ARM.
Posted by: Glen at 01/03/2008 04:02:17 PM
I agree with Jason. There is no reason to ever take an ARM.
Posted by: CAC at 01/03/2008 11:16:03 PM
The quiz is right. For someone buying a home they only plan to be in for a short period of time (5 years) can save $. My first house was bought with a 7/23 loan and sold before the balloon came due. But when we moved into the second house, I went with the 30 year fixed.
Posted by: Tony at 01/04/2008 08:41:41 AM
It seems all the answers actually should be answered, "it depends." Each scenario can be wrong or right in specific situations. The most effective answers are based on each individual's financial and emotional state....
Posted by: Foobarista at 01/11/2008 05:44:05 PM
The Roth versus Traditional question also has an element of "it depends". If you make too much for a Roth, a nondeductible contribution to a traditional IRA - and "Roth-izing" it later - is a good strategy.