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Wealth basics

7 Rules you need to know

1

50/30/20

Budget your income based on your:

  1. Needs (food, rent, etc.)
  2. Wants (vacations, new cars, etc.)
  3. Goals (savings, extra debt payments, etc.)
  • Needs = 50% of income
  • Wants = 30% of income
  • Goals = 20% of income
2

4% Rule

The 4% Rule says you can take out 4% of your savings each year during retirement without running out of money.

Example:
  • Total money = $1,000,000
  • $1,000,000 × 0.04 = $40,000
  • $40,000 ÷ 12 months = $3,333 (pre-tax)

That means you can spend up to $3,333 per month in retirement.

3

3x-6x Fund Rule

Save 3 to 6 months' worth of living expenses in an emergency fund.

Only use this fund for emergencies (like a vet bill, flat tire or medical bill.

It'll save you from taking on debt to cover any surprise expenses.

4

2x Investing Rule

For every dollar you splurge on a luxury item, invest the same amount.

Example:

If you buy a $200 pair of heels, invest $200 into your investment account.

5

3x Rent Rule

3x rent rule says rent should not exceed 1/3 of a person's gross monthly income.

The idea is that housing shouldn't consume more than a third of a person's income so you have money left over for expenses, savings and investments.

6

20/4/10 Rule

If you have to take a loan to buy a car then follow the 20/4/10 rule:

  • 20% - min down payment
  • 4 yrs - max # of years the car should be financed
  • 10% - max amount of your gross income that should be going toward your car

Remember: Most cars depreciate with time.

7

Rule of 72

Find out how long it will take your investment to DOUBLE.

Divide 72 by the growth rate of your investment (expressed as a percent).

Example: How long will it take to double your investment at 10% interest?

72 divided by 10 = 7.2 years

Need more money rules

4 rules for when you've got a solid income

8

1% Rule for Impulse Buys

If the item is over 1% of your annual gross income, wait 3 days.

If you still want the item after 3 days, get it.

Why this works:
You'll often realize you don't actually want/need that thing.

9

3X Emergency Fund Rule

Keep 3X - 6X your monthly income in an emergency fund.

When a rainy day comes, you'll weather the storm.

401(k) Match Rule

10

Many employers will match part of the money you put into retirement.

So maximize your 401(k) contribution at least up to the highest employer match offered.

This is free money.

11

The Rule of Automation

Item In, Item Out Rule

Defaults are powerful because people are lazy. So make saving your default by automating it.

Lessons:

  • Save & invest money before you ever see it
  • Create an automated saving system

Want some help understanding this stuff?

Check out our wealth dictionary to learn about every financial term you were afraid to ask about.