A “rule of thumb” is a mental shortcut. It’s a heuristic. It’s not always true, but it’s usually true. It saves you time and brainpower. Rather than re-inventing the wheel for every money problem you face, personal finance rules of thumb let you apply wisdom from the past to reach quick solutions.
I’m going to do my best Buzzfeed impression today and give you a list of 75 personal finance rules of thumb. Some are efficient packets of advice while others are mathematical shortcuts to save brain space. Either way, I bet you’ll learn a thing or two—quickly—from this list.
These basic personal finance rules of thumb apply to everybody. They’re simple and universal.
1. The Order of Operations (since this is one of the bedrocks of personal finance, I wrote a PDF explaining all the details. Since you’re a reader here, it’s free.)
2. Insurance protects wealth. It doesn’t build wealth.
3. Cash is good for current expenses and emergencies, but nothing more. Holding too much cash means you’re losing long-term value.
4. Time is money. Wealth is a measure of how much time your money can buy.
5. Set specific financial goals. Specific numbers, specific dates. Don’t put off for tomorrow what you can do today.
6. Keep an eye on your credit score. Check-in at least once a year.
7. Converting wages to salary: $1/per hour = $2000 per year.
8. Don’t mess with City Hall. Don’t cheat on your taxes.
9. You can afford anything. You can’t afford everything.
10. Money saved is money earned. When you look at your bottom line, saving a dollar has the equivalent effect as earning a dollar. Saving and earning are equally important.
I love budgeting, but not everyone is as zealous as me. Still, if you’re looking to budget (or even if you’re not), I think these budgeting rules of thumb are worth following.
11. You need a budget. The key to getting your financial life under control is making a budget and sticking to it. That is the first step for every financial decision.
12. The 50-30-20 rule of budgeting. After taxes, 50% of your money should cover needs, 30% should cover wants, and 20% should repay debts or invest.
13. Use “sinking funds” to save for rainy days. You know it’ll rain eventually.
14. Don’t mix savings and checking. One saves, the other spends.
15. Children cost about $10,000 per kid, per year. Family planning = financial planning.
16. Spend less than you earn. You might say, “Duh!” But if you’re not measuring your spending (e.g. with a budget), are you sure you meet this rule?
Investing & Retirement
Basic investing, in my opinion, is a ‘must know’ for future financial success. The following rules of thumb will help you dip your toe in those waters.
17. Don’t handpick stocks. Choose index funds instead. Very simple, very effective.
18. People who invest full-time are smarter than you. You can’t beat them.
19. The Rule of 72 (it’s doctor-approved). An investment annual growth rate multiplied by its doubling time equals (roughly) 72. A 4% investment will double in 18 years (4*18 = 72). A 12% investment will double in 6 years (12*6 = 72).
20. “Don’t do something, just sit there.” -Jack Bogle, on how bad it is to worry about your investments and act on those emotions.
21. Get the employer match. If your employer has a retirement program (e.g. 401k, pension), make sure you get all the free money you can.
22. Balance pre-tax and post-tax investments. It’s hard to know what tax rates will be like when you retire, so balancing between pre-tax and post-tax investing now will also keep your tax bill balanced later.
23. Keep costs low. Investing fees and expense ratios can eat up your profits. So keep those fees as low as possible.
24. Don’t touch your retirement money. It can be tempting to dip into long-term savings for an important current need. But fight that urge. You’ll thank yourself later.
25. Rebalancing should be part of your investing plan. Portfolios that start diversified can become concentrated some one asset does well and others do poorly. Rebalancing helps you rest your diversification and low er your risk.
26. The 4% Rule for retirement. Save enough money for retirement so that your first year of expenses equals 4% (or less) of your total nest egg.
27. Save for your retirement first, your kids’ college second. Retirees don’t get scholarships.
28. $1 invested in stocks today = $10 in 30 years.
29. Inflation is about 3% per year. If you want to be conservative, use 3.5% in your money math.
30. Stocks earn 7% per year, after adjusting for inflation.
31. Own your age in bonds. Or, own 120 minus your age in bonds. The heuristic used to be that a 30-year old should have a portfolio that’s 30% bonds, 40-year old 40% bonds, etc. More recently, the “120 minus your age” rule has become more prevalent. 30-year old should own 10% bonds, 40-year old 20% bonds, etc.
32. Don’t invest in the unknown. Or as Warren Buffett suggests, “Invest in what you know.”
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Home & Auto
For many of you, home and car ownership contribute to your everyday finances. The following personal finance rules of thumb will be especially helpful for you.
33. Your house’s sticker price should be less than 3x your family’s combined income. Being “house poor”—or having too expensive of a house compared to your income—is one of the most common financial pitfalls. Avoid it if you can.
34. Broken appliance? Replace it if 1) the appliance is 8+ years old or 2) the repair would cost more than half of a new appliance.
35. Used car or new car? The cost difference isn’t what it used to be. The choice is even.
36. A car’s total lifetime cost is about 3x its sticker price. Choose wisely!
37. 20-4-10 rule of buying a vehicle. Put 20% of the vehicle down in cash, with a loan of 4 years or less, with a monthly payment that is less than 10% of your monthly income.
38. Re-financing a mortgage makes sense once interest rates drop by 1% (or more) from your current rate.
39. Don’t pre-pay your mortgage (unless your other bases are fully covered). Mortgages interest is deductible, and current interest rates are low. While pre-paying your mortgage saves you that little bit of interest, there’s likely a better use for you extra cash.
40. Set aside 1% of your home’s value each year for future maintenance and repairs.
41. The average car costs about 50 cents per mile over the course of its life.
42. Paying interest on a depreciating asset (e.g. a car) is losing twice.
43. Your main home isn’t an investment. You shouldn’t plan on both living in your house forever and selling it for profit. The logic doesn’t work.
44. Pay cash for cars, if you can. Paying interest on a car is a losing move.
45. If you’re buying a fixer-upper, consider the 70% rule to sort out worthy properties.
46. If you’re buying a rental property, the 1% rule easily evaluates if you’ll get a positive cash flow.
Spending & Debt
Do you spend money? (“What kind of question is that?”) Then these personal finance rules of thumb will apply to you.
47. Pay off your credit card every month.
48. In debt? Use psychology to help yourself. Consider the debt snowball or debt avalanche.
49. When making a purchase, consider cost-per-use.
50. Make your spending tangible with a ‘cash diet.’
51. Never pay full price. Shop around and do your research to get the best deals. You can earn cash back when you shop online, score a discount with a coupon code, or a voucher for free shipping.
52. Buying experiences makes you happier than buying things.
53. Shop by yourself. Peer pressure increases spending.
54. Shop with a list, and stick to it. Stores are designed to pull you into purchases you weren’t expecting.
55. Spend on the person you are, not the person you want to be. I love cooking, but I can’t justify $1000 of professional-grade kitchenware.
56. The bigger the purchase, the more time it deserves. Organic vs. normal peanut butter? Don’t spend 10 minutes thinking about it. $100K on a timeshare? Don’t pull the trigger when you’re three margaritas deep.
57. Use less than 30% of your available credit. Credit usage plays a major role in your credit score. Consistently maxing out your credit hurts your credit score. Aim to keep your usage low (paying off every month, preferably).
58. Unexpected windfall? Use 5% or less to treat yourself, but use the rest wisely (e.g. invest for later).
59. Aim to keep your student loans less than one year’s salary in your field.
The Mental Side of Personal Finance
At the end of the day, you are what you do. Psychology and behavior play an essential role in personal finance. That’s why these behavioral rules of thumb are vital.
60. Consider peace of mind. Paying off your mortgage isn’t always the optimum use of extra money. But the peace of mind that comes with eliminating debt—it’s huge.
61. Small habits build up to big impacts. It feels like a baby step now, but give yourself time.
62. Give your brain some time. Humans might rule the animal kingdom, but it doesn’t mean we aren’t impulsive. Give your brain some time to think before making big financial decisions.
63. The 30 Day Rule. Wait 30 days before you make a purchase of a “want” above a certain dollar amount. If you still want it after waiting and you can afford it, then buy it.
64. Pay yourself first. Put money away (into savings or investment accounts) before you ever have a chance to spend it.
65. As a family, don’t fall into the two-income trap. If you can, try to support your lifestyle off of only one income. Should one spouse lose their job, the family finances will still be stable.
66. Every dollar counts. Money is fungible. There are plenty of ways to supplement your income stream.
67. Savor what you have before buying new stuff. Consider the fulfillment curve.
68. Negotiating your salary can be one of the most important financial moves you make. Increasing your income might be more important than anything else on this list.
69. Direct deposit is the nudge you need. If you don’t see your paycheck, you’re less likely to spend it.
70. Don’t let comparison steal your joy. Instead, use comparisons to set goals. (net worth).
71. Learning is earning. Education is 5x more impactful to work-life earnings than other demographics.
72. If you wouldn’t pay in cash, then don’t pay in credit. Swiping a credit card feels so easy compared to handing over a stack of cash. Don’t let your brain fool itself.
73. Envision a leaky bucket. Water leaking from the bottom is just as consequential as water entering the top. We often ignore financial leaks (e.g. fees), since they’re not as glamorous—but we shouldn’t.
74. Forget the Joneses. Use comparisons to motivate healthier habits, not useless spending.
75. Talk about money! I know it’s sometimes frowned upon (like politics or religion), but you can learn a ton from talking to your peers about money. Unsure where to start? You can talk to me!
The Last Personal Finance Rule of Thumb
Last but not least, an investment in knowledge pays the best interest.
Boom! Got ’em again! Ben Franklin streaks in for another meta appearance. Thanks Ben!
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Your blog has almost covered all the aspects related to finance. You have given a great perspective and lookout by segregating all the topics. I have slowly started implementing the basic points mentioned by you and I have truly felt the difference.
Arvind – hey man! thanks so much for the kind words. I’m glad the blog has helped you 🙂
very nice blog, Even with many social media followers. I have read your whole blog which is awesome.Very useful and knowledgeable blog. I learn so many things from here. Thanks for sharing this blog with us.
Thanks Felix! Happy to have you here