10 money rules everyone should know by now

Today, I want to highlight some of the most popular money rules that you might find useful. I highly recommend giving them some thought, as they could be beneficial for you!

Why do I believe these money rules are important? They can improve your financial fitness and most likely help you in growing your wealth and wisdom.

Let’s dive in!

The 3-6x emergency fund rule states that you should have at least 3 (up to 6) months worth of living expenses saved somewhere. This fund should then only be used for actual emergencies, like a vet bill, flat tire or medical bill. This creates a financial cushion to prevent you from going into debt due to unexpected costly events.

How this rule works

1. Calculate your total monthly living expenses: add up all the costs you absolutely need to pay each month, like rent, groceries, utilities, transportation, insurance and minimum debt payments
2. Multiply by 3 (or 3-6): multiply that calculated amount by 3 (or by a number between 3 and 6. The higher number provides greater security but requires more saving of course.

An example

You have calculated that your total monthly living expenses are $2,500. Your 3-month emergency fund should be: $2,500 x 3 = $7,500. Your 6-month emergency fund would need to be: $2,500 x 6 = $15,000. In this case, you should aim to have between $7,500 and $15,000 saved somewhere.

My thoughts on this rule

This is a very good rule. You should really try to follow it. It is an important part of building financial security. It may not be easy, but it could save you one day. And you will thank yourself for building that emergency fund.

Keep the fund easily accessible, because you never know how quickly you may need to access it in an emergency.

Finally, the length of your emergency fund (3, 4, 5, or 6 months) is a personal choice and depends on your personal circumstances, job security, and risk tolerance.

The 3x rent rule is a commonly used guideline. The rule says that your gross monthly income should be at least three times your monthly rent (or mortgage) payment. The idea is that housing shouldn’t consume more than a third of your income so you have enough money left over for all other expenses, savings and investments.

How the rule works

1. Calculate your gross monthly income: add up all your monthly income from all sources, before taxes and other deductions.
2. Determine your monthly rent: this should include the rent (or mortgage) payment and any associated fees and potentially utilities you need to pay.
3. Apply the rule: divide your gross monthly income by your monthly rent. If the result is 3 or more, you meet the rule. If it’s less than 3, the rule suggests that your rent is too high relative to your income.

An example

Your gross monthly income is $6,000. Your monthly rent is $1,900. Now apply the rule: $6,000 / $1,900 = 3.16. So, you meet the 3x rent rule. Your rent is not too high.

My thoughts on this rule

I think this rule makes a lot of sense. It is a helpful starting point for assessing rent affordability, your rent should not be too high. You should be able to afford it. Because you need to be able to pay for other things besides your house. You don’t want to be hungry in a nice house 🙂

Therefore, it is important that you evaluate your overall financial picture and circumstances when deciding how much rent to pay. So use this rule along with a budgeting rule. And that’s what the next rule is all about.

The 50/30/20 rule is a simple budgeting idea. It’s meant to help you manage your money effectively. The rule helps you make sure you’re not spending too much on wants and that you save some for your future. It suggests that you divide your after-tax income into three categories:

• 50% for Needs: This is the biggest part. It covers all the things you need to pay. Think rent or mortgage, groceries, transportation, and essential bills (electricity, water, internet). These are things you can’t easily cut back on.
• 30% for Wants: This is the fun part. It’s for things you want, but don’t necessarily need. This could be eating out, going to the movies, buying new clothes, or hobbies. It’s important to have fun, but you should be careful not to make this part too big.
• 20% for savings & debt payments: The smallest part, but very important. This money goes towards saving for the future (like college, a car, or retirement) and paying off any debts (like credit cards or loans). This is crucial for long-term financial fitness.

An example

If you earn $3,000 per month, this is how you should divide your expenses:

• Needs: $3,000 x 0.5 = $1,500 for the things you need to pay
• Wants: $3,000 x 0.3 = $900 for fun
• Savings & Debt Repayments: $3,000 x 0.2 = $600 for your future

My thoughts on this rule

Just as the previous two, this is a good rule that makes a lot of sense. If you use the guidelines you have a great starting point for managing your money. You might need to adjust it a little bit based on your own situation, but that’s ok. Just try to keep the percentage as suggested by the rule.

This 10-5-3 rule is all about the expected returns you get when investing (or saving) money. The rule tells you that different assets have different yearly returns. These are the returns expected by the rule:

• Equity/Mutual Funds – 10%:  10% is the yearly return you may expect when you invest in stocks or mutual funds
• Debt – 5%: Debt investments (like bonds) are generally safer than stocks. They might give you a 5% expected return each year. It’s lower, but less risky.
• Savings – 3%: These are slow-and-steady plants. Savings accounts and similar options are the safest. They’ll likely give you a 3% return each year. Your money is safe, but it won’t grow as fast.

My thoughts on this rule

This rule as a guideline for asset returns is too broad, too general. It has several downsides. First of all the rule is way too simple. It uses broad averages (10%, 5%, 3%) for expected returns, while actual returns in any given year can vary significantly. Secondly, the rule doesn’t explicitly address the level of risk associated with each asset. And, lastly, and maybe most importantly, the rule might give a false sense of security regarding guaranteed returns. Past performance is not indicative of future results.

In short, the rule gives you a rough idea of what returns you can expect, but please don’t rely on this rule to make actual decisions.

You now do have a rough idea of how much return you can expect. Now you can figure out how long it will take for your fund to double in value. How? That’s what the next rule will tell you.

Imagine you have some money invested, and it’s growing at a certain rate. Now, there’s a handy rule called the “Rule of 72” that helps you figure out how long it’ll take for your money to double.

Here’s how it works

Divide 72 by the interest rate (as a percentage). The answer is approximately the number of years it will take to double your money.

An example

Let’s say your investment earns 8% interest per year.

• 72 / 8 = 9

This means it will take approximately 9 years for your investment to double in value.

My thoughts on this rule

The rule gives you an estimate. The actual time it takes might be slightly different, but it’s a useful shortcut for quick calculations. The rule of 72 works best for interest rates between 6% and 10%. For rates outside of that range, the estimate becomes less accurate.

This rule has nothing to do with math, but more with your mindset and behavior. The 2x investing rule is a simple idea suggesting that for every dollar you spend on a non-essential thing (something you want, but not need), you invest an equal amount. It’s a strategy to help you build wealth while still allowing yourself nice things from time to time.

How it works

Pretty simple: whenever you buy something you don’t need but just want, you immediately invest the same amount of money into your investment accounts.

For example

Well, let’s say you buy a new pair of shoes for $200. Following the 2x investing rule, you would also put $200 into your investment account.

My thoughts on this rule

This rule is a nice idea. It gives you the opportunity to buy the things you want. So it does not feel as restrictive as a budget might make you feel. However, you need to combine this rule with a budget. Because everything you want becomes twice as expensive. It makes you think before you buy. Which is a good thing.

It’s a simple rule. But it is not an easy rule to follow. You have to be disciplined. That can be hard.

It’s also a good way to build a habit of investing regularly while still allowing for some fun purchases.

The 4% Rule is a guideline for how much you can safely withdraw from your retirement savings each year without running out of money.

How it works

Imagine you’ve saved a big pile of money for retirement. The 4% Rule says you can take out 4% of that total amount in the first year of retirement. Then, each year after that, you increase that withdrawal amount by the rate of inflation. This way, your withdrawals keep pace with rising prices, and your savings should last for at least 30 years.

An example

Let’s say you have $1,000,000 saved for retirement.

• Year 1: You withdraw 4% of $1,000,000, which is $40,000.
• Following years: You’d adjust that $40,000 amount upward each year to account for inflation. If inflation is 2%, you’d withdraw $40,000 x 1,02 = $40,800 the second year, and so on for each following year.

The rule can also be used to calculate how much money you need to have if you want to retire, your so called retirement number. In that case you just use the rule the other way around:

• If you want to retire with an annual income of $50,000, divide your yearly income by 4%. In that case, you would a nest egg of: $50,000 / 0,04 = $1.25 million.

My thoughts on this rule

The 4% rule is a good guideline, but you have to pay attention to it. You can’t just retire, trust the rule, and expect everything to be fine.The 4% rule is based on a specific rate of return on investment and a particular rate of inflation. If your investments don’t perform as planned, or if inflation is higher than expected, you may run out of money sooner.

The rule can help you prepare for a sustainable retirement income, but remember that it’s a simplification and must be carefully considered in your unique circumstances.

This is a rule used for asset allocations in your portfolio. The 100 minus your age rule is a simple guideline for determining what percentage of your portfolio should be invested in stocks vs. bonds or other less risky investments.

How it works

The rule suggests that you subtract your age from 100. The resulting number represents the percentage of your investment portfolio that should be allocated to stocks. The remaining percentage would be allocated to bonds and other more conservative investments.

An example

• A 30-year-old: 100 – 30 = 70. So, this person should invest 70% in stocks and 30% in bonds.
• A 60-year-old: 100 – 60 = 40. So, this person should invest 40% in stocks and 60% in bonds.

My thoughts on this rule

This rule shouldn’t be taken too seriously. I think it’s too simple to think about asset allocation this way.

The rule doesn’t consider things like how much risk you can handle, your investment goals, or your specific financial situation. For example, someone who is more comfortable with higher risk might be okay with more stocks when they’re older. But someone who is more comfortable with lower risk might want less stocks when they’re younger.

Also, the rule assumes that younger investors have more time to recover from market downturns. That may not be true. Your time horizon depends on your investment goals. Age is just one of many factors.

This rule is a guideline for borrowing money. It states that your total monthly payments on all loans should be no more than 40% of your monthly income. Income in this case means your gross monthly income before taxes.

It is also good to know that EMI stands for “Equated Monthly Installment”. So, EMI is equal to the sum of all your monthly payments for all your loans. For example, if you earn $5,000 per month, your EMI should be less than $2,000.

This guideline helps you avoid taking on more debt than you can handle. It helps in keeping enough money per month to pay for bills and other things. By keeping your EMIs below this level, you reduce the chances of money problems.

How it works

1. Calculate your gross monthly income: Determine your total monthly income before taxes and other deductions.
2. Calculate 40% of your income: Multiply your gross monthly income by 0.4 (40%).
3. Determine your EMI: Add up all your monthly EMI payments for all your loans.
4. Compare: Compare your EMI to the 40% limit calculated in step 2. If your EMI is greater than 40% of your gross income, your debt burden is high.

An example

Let’s say your income is $6,000. Then 40% is $2,400. According to the 40% EMI rule, your total monthly payments on all loans should not be no more than $2,400.

My thoughts on this rule

In general, this is a good guideline. But everyone is different and every situation is different. You may feel comfortable with a lower percentage, or you may feel brave and go with a higher percentage. Your percentage may also change as you age or as your life changes. Your savings or cost of living are also factors to consider.

It is also crucial to consider all your other monthly expenses like rent, food, transportation, utilities and all other things when assessing the overall affordability. Even if your EMIs are within the 40% limit, high other expenses could still lead to financial problems.

My final point would be to keep the EMI percentage as low as possible and use debt only to buy a home or for a solid business.

This rule is a nice guideline if you want to finance a car. It’s goal is to help you avoid getting into too much debt. It suggests structuring your car loan based on these three key percentages:

• 20% down payment: at least make a down payment of 20% or more. This reduces the loan amount and lowers your monthly payments and the total interest you’ll pay over the life of the loan.
• 4-Year loan term: go for a 4-year loan. Not longer. Longer loan terms, like 5, 6, or 7 years, have lower monthly payments, but you’ll end up paying much more interest overall.
• 10% of gross income: make sure you spend no more than 10% of your gross monthly salary on this car loan.

An example:

Let’s assume your income is $5,000 and you want to buy a $20,000 car. Then this is how your loan should look like this:

• 20% down payment: $20,000 x 0.2 = $4,000
• Loan Amount: $20,000 – $4,000 = $16,000
• Maximum monthly payment: $5,000 x 0.10 = $500

When financing your car, keep these numbers in mind. If the proposed loan exceeds the numbers, reconsider the loan offered. Or increase your down payment. Or get a cheaper car.

My thoughts on this rule

If you plan to finance your car, this is a good guideline to follow. Also keep in mind that owning and driving a car comes with other monthly costs, such as insurance, registration, maintenance, and the often forgotten depreciation.

In general, my advice is: don’t borrow money to buy a car. Buy a car when you have the money and can pay directly.

Wow, that were ten popular money rules. Some good, some not so. Maybe you have heard of some of them before. Maybe some of them were new to you and made you think. My idea is that they will improve your finances. At least, I really hope so.

I hope you enjoyed this. If you have a rule you think I should add here, please let me know in the comments below. Thanks for reading this far.

Have a great day!