In the world of personal finance, there are many rules for different people with different situations. If you’re saving for a house, there’s a rule for that. If you’re looking in the market for a car, there’s a rule for that too. Just about every situation has a rule you can apply to it.
That is the key to this post. These aren’t rules that you must follow exactly as it’s written. Instead, you can use any of these 15 rules and modify them as they apply to your life. Remember to treat them as a guideline to where you’re trying to go.
Read on and learn about these 15 financial “rules”.
1) 72 Hour Rule (not to be confused with rule of 72)
There are times when you must decide between making that impulse purchase or giving yourself time to think about it. There is no science to the exact amount of time you should wait which is where the 72 hour rule comes in.
The rule is very straightforward, before you purchase an item under the “want” category, wait 72 hours. If you need to define what a need versus a want is, think of wants as a non-essential, good-to-have purchase. It isn’t required to live but having it would bring you happiness.
How long someone feels happy from that purchase is subjective. Some people will feel amazing for making that purchase. It can carry on for weeks. Those purchases are ones you know were well worth the purchase.
Others will immediately regret buying an item. They don’t realize it at the time that this wouldn’t fulfill them emotionally. Instead, they will search for something else to buy and fill that void. When you give yourself a 72 hour waiting period, you alleviate the emotional attachment and allow the brain to use logic instead.
2) 70% Rule
It is important to have a goal for your spending every month. I don’t mean a goal of reaching a certain amount. The goal to shoot for is the amount you don’t exceed when compared to your take-home monthly pay. 70% of your monthly pay is a good place to start.
All your spending in a month will fall within this range. Groceries, dining out, utilities, gas, fun. Basically anything you spend money on should not exceed 70% of what you bring home. This isn’t set in stone but it gives people a great place to start.
For beginners, I’d start here. When I was beginning down the road of budgeting, I didn’t even realize it but my spending hovered close to the 70% range. Eventually I was able to lower it even more but only after staying under this range for a while.
3) 30-30-30-10 Rule
The 30-30-30-10 rule states this:
- 30% of your income set aside for savings & investments
- 30% of your income spent on expenses like groceries and other essential items
- 30% of your income paid towards your debt & liabilities
- 10% of your income saved for vacations & entertainment
This is a more extensive breakdown of the 70% rule. Basically it gives you a target percentage for the various areas that you spend money on in any given month while allowing you the room for the future fun activities you may want to enjoy some day.
Those who seek a comprehensive approach with their budget will benefit from this style of budgeting. It covers the basic categories of spending. What I like most is how it separates normal spending from debt repayment. The tough part is lowering those debt payments to 30% especially in high cost of living areas. I would know since my mortgage payments far exceeded this amount (I used to live in Hawai’i).
4) 30 Day Rule
If you, or your significant other, have a difficult time controlling your spending, try this method. Instead of buying an item, whether it be in a store or online, wait 30 days before making the purchase. Then come back to that item and see if you are still interested in buying it.
Don’t do this for every single item unless your spending is really that bad. Set a threshold of say $50. If any item costs more than that, then you’ll apply the 30 day rule to it.
You may find that you really don’t have a desire to buy that item anymore. This could save you from an impulse buy that wouldn’t have benefited you in the first place. If you still feel the need to purchase it after 30 days, I think it’s safe to say that you’ll enjoy the item way more.
5) Rule of 72
You’ve probably heard of this rule. But in case you haven’t, here’s how it works. To figure out the estimated time it takes to double your money, divide 72 by the expected growth rate (expressed in a percentage).
For example:
Investment $25,000
Growth rate 10%
72 / 10 = 7.2 years
In this example, a $25,000 investment growing annually at 10% will double its value in 7.2 years. This is a pretty nifty rule if you want to project what your portfolio could be in the future. If you consider what the stock market’s average return is, which hovers around 7-10%, you can safely assume when your investment will double.
6) 28/36 Rule
Lenders will use the 28/36 rule to decide how much house you, the borrower, can safely afford. It’s very simple to understand.
- A household shouldn’t exceed 28% of the gross monthly income including everything within the home mortgage (principal, interest, taxes, insurance).
- The total household debt shouldn’t exceed more than 36% of the gross monthly income. This is also known as the debt-to-income (DTI) ratio.
Potential homeowners can use this rule of thumb to gain a better idea of what lenders are looking for. If you live in a high COL area, pair this rule with the 20% down payment rule or aim for a 30-year mortgage. These will help lower your monthly mortgage payments and avoid PMI.
7) 80/10/10 Rule
Here’s another budget to experiment with. It breaks down to three major areas.
- 80% of income spent on food, rent, clothing, utilities, and other essential items
- 10% of income given to charity
- 10% of income saved or invested for the future
Since the 80% is a major chunk, this may not be an ideal budget for many couples who’ve lowered their expenses substantially. But if you’re just beginning and need a place to begin, it never hurts to have a target percentage for different spending areas.
Just like any budget, feel free to play around with the numbers. If you don’t feel comfortable saving just 10%, lower your spending to match your comfort zone. If you’re in the process of paying off debt, apply that 10% to debt payoff rather than save for an investment. You can adjust these percentages to suit your needs.
8) 3 to 6 Month Rule
When a financial emergency occurs, the last thing you want to worry about is having enough money to pay for it. That is why saving at least 3 to 6 months’ worth of monthly expenses in an account is ideal to weather just about any storm. Just ensure that this account is for real emergencies and nothing else.
Another factor to remember is keeping this emergency fund as liquid as possible meaning you can easily access it within a few business days. Every day your money is transferring is a day wasted. You want this money to be in your hands as soon as possible.
9) 25x Rule
If you’re like me, you don’t want to spend the majority of your life working. This raises the question, how much money do I need to safely retire? That’s where this rule comes in. It states that you should shoot for 25 times your annual expenses.
If your annual expenses are approximately $40,000 then that means you need to save a hefty $1 million before you should entertain the idea of retirement.
While no one can predict what the future will be like, if you envision having much less expenses later in life (paid off mortgage, kids started their own family, cheap hobbies) your current expenses will be far below your future expenses. As long as you keep your expenses in check, you should be fine with using this rule.
10) 4% Rule
All around the personal finance community, you’ll hear about this rule otherwise referred to as the “Trinity Study”. This was a study done by three professors on determining safe withdrawal rates from a retirement portfolio containing stocks.
They figured if an investor only withdraws 4% of their retirement portfolio every single year, they will have enough money to sustain them for a very long period or before passing away. This rule goes hand in hand with the 25x rule above. If you can survive on 4% of your investment, or 1/25th, you can reasonably assume that your money will not run out before you do.
11) 20% Down Payment Rule
If a future homeowner wants to avoid unnecessary fees that serve no purpose for them, aiming to save 20% of the home value is a good place to start. Having some skin in the game prevents you from paying for PMI, or private mortgage insurance.
PMI is an insurance that protects the lender in case you default on the loan. Typically, PMI payments disappear once you reach the point of 20% equity but not always. The unfortunate will find themselves making PMI payments for the duration of the loan. The only option is refinance which may or may not be ideal. Just avoid it all by saving the 20%.
12) 15% Rule
Here is, once again, another retirement rule. But just like any other rule, they are mere suggestions to what you can do. In the end, you make the final decision with your finances. This rule states that you save 15% of your income for investing towards retirement.
Many wonder why only 15% and not more or less. It comes down to priorities in the present time like kids, home, and student loans. The list goes on and on. While 15% is a good start, it probably won’t be enough to break the bank. The remainder of income can be applied to everything else that life will throw at you.
13) 20/4/10 Rule
Stretching your bank account when buying a new car will cause you to tap into other resources until it’s paid off. Keep this simple rule handy to avoid that problem, avoid taking on a bigger car loan, and keep your budget in check.
The rule goes like this:
- Put down at least 20%
- Finance the vehicle for a maximum of four years
- Keep the total monthly vehicle expense under 10% of gross income
The monthly expenses will include principal, interest, and insurance. This rule ensures comfort with your budget. You only worry about the car loan for four years and 10% still provides flexibility in case you’re hit with any financial emergencies.
14) 10x Rule
This rule is key for figuring out a conservative life insurance coverage. You will basically multiply your annual gross income by 10. That number should provide your loved ones with enough income should you pass away during whatever time period you set whether it is term or whole life.
Another way to calculate the amount of life insurance you need is to multiply your annual gross income by the number of years left until retirement. Since you’ll be living off your retirement portfolio, you won’t require life insurance at that point.
15) Rule of 55
The Rule of 55 allows money to be withdrawn from a 401(k) during the calendar year when you turn 55 if you have been laid off from your job, you quit, or fired from that job in that year. In this special case, there is no penalty charged for withdrawing funds from your current 401(k).
This only applies to your 401(k) or 403(b) accounts, not money in your IRA or any other account you may have. Also, it will apply to your current employer, the one you’ve left when you were 55 years old. Any money with a previous employer can not be touched until you turn 59 ½.
Conclusion
There you have it, 15 financial “rules” that you may not have known before and some you did. I didn’t make these rules up but I heard of a few of them. As the saying goes “rules are made to be broken”. I like to think of it as “rules are made to be modified”. You don’t have to follow any of these as they are written but you can change them to suit your personal financial needs. Keep that in mind, you might conjure up a brand new rule for others to follow.
Which of these rules apply to you? How many have you heard of? What rule surprised you the most?