Hey friend,
Day 9 of WEALTH 365
What do you get when you follow money rules?
The answer is increased wealth.
In fact, self-made millionaires are 4x more likely to follow money rules than non-millionaires.
And not only that...
But following money rules can:
Help you retire earlier
Help you make more money
Help you get out of debt faster
Help you lower your stress levels
So if you want to build wealth, you'll love today's newsletter.
Let's kick things off with money rule #1:
1. 50/30/20 Rule
The 50/30/20 rule helps you take control of your money.
Start by categorizing your spending into 3 sections:
Needs (food, rent, utilities, etc.)
Wants (vacations, cars, eating out, etc.)
Goals (savings, investments, extra debt payments, etc.)
Once you have a better idea of your expenses...
See if they align with the 50/30/20 Rule:
50% of your income goes to NEEDS
30% of your income goes to WANTS
20% of your income goes to GOALS
And if your spending doesn’t align [yet] with the 50/30/20 rule?
Start making small adjustments to your budget.
2. 3-6x Emergency Fund Rule
Always be prepared for unexpected expenses.
Surprise expenses could include:
A car repair
A house repair
A medical emergency
Avoid using high-interest credit cards to pay for surprise expenses.
Instead, save 3 to 6 months’ worth of basic living expenses in an emergency fund.
Pro tip: Multiply your wealth by storing your emergency fund in a high-yield savings account.
A high-yield savings account could earn you over 4% APY (variable rate).
A 4% rate on $10,000 of cash would earn you $400.
For doing absolutely NOTHING.
3. Rule of 72
Find out how long it will take your investment to DOUBLE.
Divide the number 72 by the expected growth rate of your investment.
This expected growth rate is expressed as a percent.
Here's an example:
Let's say you invest $10,000 in a rare art painting.
And that painting averages returns of around 17.8% per year.
So according to the Rule of 72, you would double your money in 4 years.
72 ÷ 17.8 = 4.044 years!
The Rule of 72 can also tell you how long it will take for your money to HALVE due to inflation.
Here's an example:
Let's say you have $10,000 in cash...
And inflation is stuck at 9.1%...
It would take your money 7.9 years to HALVE itself.
72 ÷ 9.1 = 7.9 years!
4. The 4% Rule
The 4% Rule says you can take out 4% of your savings each year during retirement without running out of money.
It helps you plan how much money you can spend without using it up too fast.
For example:
Let's say you saved $1,000,000.
Here's how to use the 4% Rule:
Total money = $1,000,000
$1,000,000 x 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.
Now, this rule is not perfect.
There are a few considerations to keep in mind, like inflation.
So it should only be used as a guide.
5. 3x Rent Rule
The 3x rent rule says rent should not exceed three times a person's gross monthly income.
Here's an example:
Let's say the rent for an apartment is $800 per month.
The 3x rent rule suggests you should earn at least $2,400 per month ($800 x 3) to afford it comfortably.
The idea behind this rule is that housing shouldn't consume more than a third of a person's income.
Why?
So you have money left over for expenses, savings, and investments.
Remember: This rule is not set in stone and should only be used as a guideline.
6. 5x to 6x Rule
The 5x to 6x rule suggests buying term life insurance worth 5x to 6x your gross annual salary.
Here's an example:
Let's say you have an annual gross salary of $60,000.
According to the 5x to 6x rule, you should look for a term life insurance policy with a death benefit in the range of $300,000 to $360,000.
($60,000 x 5 = $300,000 and $60,000 x 6 = $360,000).
Remember to consider your debts, number of kids, etc. to better customize your life insurance needs to your situation.
Consider buying term life insurance to protect yourself and your family.
7. 20/10 Rule
The 20/10 Rule helps you decide WHEN it makes sense to take on debt.
Here's how it works:
Your total debt should NOT be more than 20% of your annual income
Your total monthly debt payments should NOT be more than 10% of your monthly income
Here's a quick example:
Let's say you earn $100,000 per year (so $8,333 per month)
According to the 20/10 rule, your total debt should NOT be more than $20,000 (20% of $100,000)
And your total monthly debt payments should not be more than $833 (10% of your monthly income at $8,333)
Here are some items that are NOT included in the 20/10 Rule:
Mortgage payments
Monthly rent payments
Student loan debt payments
The 20/10 Rule works best BEFORE you take on debt.
It helps you borrow and repay money responsibly.
The Bottom Line
Following money rules is an easy way to keep your finances on track.
Not only that, but they also help you visualize your path to wealth.
Start today.
Your bank account will thank you later,