6 Financial & Investment Rules of Thumb

The world of finance is filled with guidelines related to numbers and ratios. These guidelines are often based on collective experiences that have evolved into practical rules. These "rules of thumb" can serve as a simple starting point for making financial and investment decisions.

What Are Some Examples of the Rule of Thumb?

1. 50-30-20 Budgeting

Dividing income into 50% for needs, 30% for wants, and 20% for savings is a common practice for those new to managing their finances. However, this ratio can be adjusted as income and investment knowledge increase.

2. Emergency Fund Rule

How much emergency fund should one have to face unexpected events? Some guidelines suggest a minimum of 3–6 times monthly expenses for singles, while for married couples with children, it's 9–12 times household expenses.

3. Maximum Monthly Installment

Healthy debt management limits monthly installments to a maximum of 30-35% of income. Exceeding this can lead to financial difficulties, forcing one to cut back on essential expenses, withdraw savings, or even incur new debt. To overcome this, reduce secondary and tertiary expenses so that the debt-to-income ratio returns to an ideal level.

4. 10/4/80 Retirement Planning

Retirement must be carefully planned to ensure a peaceful life in old age. One can invest 10% of their monthly income before retirement, withdraw no more than 4% per year after retirement, and aim to achieve 80% of their pre-retirement income.

5. Dry Powder Allocation

Dry powder refers to funds set aside outside of primary investment capital to capitalize on incidental opportunities. This allows investors to take advantage of opportunities without having to sell other assets at a loss. Investors can allocate around 10-15% of their investment capital as dry powder each month.

6. 60:40 Portfolio Strategy

An investment strategy that allocates 60% of the portfolio to stocks and 40% to bonds aims to provide growth and stability from both instruments. Alternatively, there's the "rule of 100", which subtracts one's age from 100, resulting in the ideal percentage allocation to stocks, with the remainder in bonds.

Disclaimer: The content is made for educational purposes, not a recommendation to buy or sell a particular stock. PT KAF Sekuritas Indonesia is licensed and supervised by the Financial Services Authority (OJK).