Rules of Thumb & Why They Can Be Dangerous
My brother sent me an article titled, “The Answer to This Question Will Tell You If You’re Wealthy.” (Spoiler alert: the author believes how long you can survive with absolutely no income will tell you if you’re wealthy or not). The article was similar to countless other articles I’ve seen expounding on one rule of thumb or another, in fact, as financial blogging and podcasting has become ever more prevalent, these financial rules of thumb are thrown around by an increasing number of well-intentioned people with no actual training or education in the financial industry. And, I’ll admit it, I like rules of thumb, but there are right and wrong ways to use them. They’re great if they bring something to your attention that you may have overlooked and lead you to dive into that topic for a thorough analysis. Unfortunately, and what makes them so dangerous, is that people tend to consider that all that’s required to understand. Put simply:
Rule of Thumb Inspires Action = 👍
Rule of Thumb Provides the Entire Answer = 👎
Rules of thumb are great for two situations – either when the answer is difficult or impossible to find with a high degree of confidence (how long should a meditation session last?), or when the consequences of a decision are relatively insignificant beyond a given range (how much air to put into the suspensions of a mountain bike? Although some avid bikers may fire me as an advisor for deeming that insignificant). The decisions you make around your financial well-being are neither impossible to answer with a high degree of confidence nor are they insignificant in nature! For this reason, although rules of thumb can be a great first step, a tool to help bring things to our attention that we might have missed, and inspire us towards action – they should not be the end all be all of our financial research. You owe yourself and your family more than that.
My rule of thumb is this: never rely solely on the rule of thumb for an entire answer.