Top Money Rules of Thumb You Need To Know

Top Money Rules of thumb are a good starting point for getting your finances on track, so we’ve put together ten good tips to follow.

However, since everyone’s situation is different, we’ve also included scenarios in which these rules are most applicable.

Top Money Rules of thumb are basically loose “rules” that apply broadly to many different situations. We talk about Finance Rules of Thumb a lot here on Zerox24.

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When it comes to Personal Finance, the key word is “Personal.” There are no one-size-fits-all rules for running your:

• Savings,
• Budget,
• Retirement planning, or other aspects of your financial life.

With that said, some general, tried-and-tested rules can prove useful for planning your Financial Life.

While you might decide to tweak these rules in application, they can be helpful for guiding your financial decision-making.

So without further ado, here are Top Financial Rules of Thumb that will help you rock your budget (and retirement savings, future financial planning, and more!).

Lists can help organize your thoughts. I have created them for everything from rules for investing to financial phrases to avoid.

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As someone who has spent decades thinking about money – saving it, investing it and spending it – I have come to recognize several fundamental truths about money that I have compiled into a list.

Have you ever thought of putting Rules On Your Money? It is a pretty interesting concept.

We tend to have rules for every other area of our life:

• How much to eat,
• How much we should watch TV,
• Limiting the amount of social media,
• Amount of time to brush our teeth, etc.

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Then, that love hate relationship comes up with rules.

We love rules because they provide structure and guidance when we need it the most. We hate rules because rules are meant to be broken. The golden rules are the ones that should be so ingrained in our lives that we don’t think differently.

Why Is Personal Finance Important?

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Personal finance is not just for those that find it interesting. Everyone needs to know the basics of personal finance principles to become wise with their money.

The best part is you need to know the minimum financial rules to be successful. You don’t need a CFP, a financial advisor, or have a degree in accounting and finance. You must be willing to learn a few things to be successful. That is all.

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Specifically, here are personal finance guidelines:

• Less stress with money
• Life the live you dictate
• Enhance your cash flow
• Increase your net worth
• Know where you money goes
• Actually have money to invest
• Improve your standard of living
• Prepared for life’s unexpected curve-balls
• Don’t have to worry about your credit score
• Security blanket with proper insurance coverage
• Understand why ROI (return on investment) matters

Personal Finance is Important.

But, too often we are still left wondering… What is the rule of thumb in finance? These are all of the items we listed out above. These are the rules of thumb in finance you need to know.

Don’t ignore the obvious. Pick up one of the Best Finance Books to get you started. And make sure to stick around Money Bliss, we have something coming up that you don’t want to miss!

Best Money Rules of Thumb You Need to Know By Heart

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This list of money rules are non-negotiable. And make sure to teach them to your kids.

1. Say No To Debt: Top Money Rules of Thumb

Debt is truly the cash flow killer. Those debt interest payments will hold you back from living the life you want to live. Would you rather… be the person paying those interest payments? Or would you rather be the one collecting those interest payments?

My answer – I would much rather collect interest payments and make money on my money. When we decided to pay off our student loan debt, we shaved almost $10,000 in interest payments alone.

The ability to access debt is easy and so very tempting with zero down and zero-interest payments. If the debt is a must, then truly decide if going into debt is worth it or if you can pay cash for it.

Side note on mortgage debt... in many cases, mortgage debt can be less than the cost of renting. So, it makes financial sense to finance debt for an appreciating asset. (A car does not appreciate in value. It is a decreasing asset and depreciates quickly.)

2. Talk About Money

Oh goodness! Money secrets can cause so many issues within a relationship. Don’t think of talking about money is taboo.

Outside of a personal relationship, you don’t have to go into details about how you make, your mortgage, or how much you are paying for your kid’s sports.

But, you can have open conversations about how you plan to pay off debt, ways you are saving money, and helpful money books you are reading.

By talking about money, you have people that will help you to be accountable for your money decisions.

3. Have Money Goals: Top Money Rules of Thumb

Money rules and money goals in the same sentence? Yes!! This is probably the most important financial rule. Okay, probably not…all 10 money rules are equally important.

But, having a money goal will keep you motivated through the other financial rules. That is important. It is easier to say no to something when you have your bigger money goal in mind.

4. Learn From Mistakes

I’ll admit. I am far from perfect. Most of the tips you will find on Money Bliss happened because of mistakes that I have made. Call it the school of hard knocks.

These money lessons changed our trajectory of where we were headed… specifically from living paycheck to paycheck to on our path to financial freedom.

Once I become honest with myself and the stupid money decisions I made, it was easier to move forward and learn from my mistakes. Don’t cower from your mistakes. You can keep making them if you want. Or wake up and do something different.

5. Pay Your Bills On Time

This is one lesson I learned from my parents. A late payment was not acceptable. Period. End of story.

If you are unable to pay your bills on time, then you need to have less obligations to make sure bills are paid. There are two ways this happens:

• You don’t have enough money
• Your personal finances are a mess

The second one is easier to overcome with our free Bill Payment Template. The first one is more difficult, but can be done by spending less money or earning more income.

6. Don’t Have A Tight Fist: Top Money Rules of Thumb

Be willing to open up your fist and let a few dollars slip through. This is a tough money rule for all of us to learn. We feel the need to hold onto our money so tightly that it won’t go away. However, it is a blessing to open up your tight fist and be generous to others.

It is a chance to help others. It is a way to pay it forward. And it doesn’t have to be money. You can volunteer your time.

But, the question is always asked, “what’s in it for me?” Charity doesn’t give back any monetary benefits. Everything is intrinsic in value. Watch someone’s reaction to giving them $10 or buying for the person behind you.

The lesson is in values and lending a hand to help others. Give what you can without regrets.

7. Spend Less Than You Make

This may seem obvious, but with so many easy ways to access credit and debt, that we must state it first. Spend less than you make. Your income EXCEEDS your expenses.

Each paycheck you spend less money than you bring in. This simple money rule will help you stay afloat during crisis, save more money, and become the millionaire next door.

8. Establish An Emergency Fund

The backbone of money rules lies in the emergency fund. Don’t go with one!

Make sure your emergency fund is adequate for your spending. And make sure you don’t tap into your emergency fund for overspending. Here is a wise financial rule to remember…

In the perfect world, you should never use your emergency fund. But, if you do, that is why you have one.

9. Make A Plan For Your Money: Top Money Rules of Thumb

Don’t just assume… that your money can manage itself. You need to take active control of your money management. Continuing to sit idly on the sidelines will continue your current path with money.

Is that what you want?

The great part of becoming an active participant in managing money is you learn what you like to spend your money on and what you don’t like spending your money on.

A spending freeze will help jumpstart some savings when you start planning what you will do with your money.

Most people HATE the word budget. That is why we prefer to call it a Cents Plan. Figure out your “cents” and make a “plan.” A plain and simple way to make a plan for your money.

10. Know Your Savings Percentage

And increase it every year. Your savings percentage is the total amount of money saved across all of your accounts divided by your income.

This is one of the best ways to track your progress towards financial freedom.

Saving Percentage Example #1…

You saved a total of $5,000 with our 52 week money saving challenge. Your annual income is $48,000. 

Your Savings Percentage = (5,000 / 48,000) * 100 = 10.4%

Saving Percentage Example #2…

You saved a total of $12,500 between your employer’s retirement plan, emergency fund, and vacation money. Your annual income is $97,000. 

Your Savings Percentage = (12,500 / 97,000) * 100 = 12.9%

At the bare minimum, keep your savings percentage at 10%. Each year, increase your saving percentage.

Opportunities open up the more you are able to save. Ultimately, a saving percentage of 50% will help you reach financial independence faster.

Top Financial Rules of Thumb

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1. Budgeting 

The 50/30/20 Rule 

This is a popular rule for breaking down your budget.

The 50-30-20 rule is 50% of your income for necessities, like housing and bills; 30% for wants, like dining or entertainment; and 20% for financial goals, like paying off debt or saving for retirement.

There are looser variations to this rule, like the 80-20 rule, in which you use 20% of your income for financial goals and spend 80 percent on everything else.

Why it works: 

If you’re not sure where to start with a budget, breaking it up into these basic categories can be really helpful. Those percentages help create a balance between obligations, goals and splurges.

When it doesn’t: 

If you’re not earning much, you might not have the luxury of only spending half your income on necessities.

You can always make a budget that’s more tailored to your situation—start from scratch and follow these budgeting steps to design a plan that works best for you.

2. Buying Car: Top Money Rules of Thumb

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The 20/4/10 rule 

When buying a car, you should put down at least 20%, keep your car loan limited to no more than four years (to avoid interest) and spend no more than 10% of your gross income on transportation costs.

Why it Works: 

It keeps you from buying more vehicle than you can afford. Cars are expensive to maintain and this formula takes your ongoing vehicle budget into consideration by calculating total transportation costs.

These costs include your car payment, parking, gas and insurance (which varies by vehicle type).

When it Doesn’t: 

Depending on your situation, these numbers might not be realistic for you. For example, you might spend more than 10% of your gross income on transportation because you have a long, gas-guzzling commute to a low-paying job.

Since you need your car to work, you might look elsewhere in your budget to cut costs.

The 10-Year Rule

This rule has to do with the decision whether to buy a car new versus used. If you want to maximize your car’s value, you should either buy used, or buy new and drive the car for ten years.

Why It Works:

 The rule minimizes your depreciation hit—a new car loses 20 percent of its value in the first year of ownership, according to Carfax.

However, buying a used car sucks minimizes the depreciation that’s already been sucked out of the vehicle. If you buy a new car and keep it for a decade, you’ll have optimized its value and the depreciation won’t matter as much.

When It Doesn’t:

A used car is more likely to break down and require repairs.
You’ll want to make sure the maintenance isn’t more expensive than the value of sticking with a used car.

Generally speaking, research is important in considering all the variables. Edmund’s has an affordability calculator, and we’ve written about the four questions you should ask when deciding on a new versus used vehicle.

4. Homeownership: Top Money Rules of Thumb

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 The 20% rule 

You should put at least 20% down when buying a home.

Why it works: 

It ensures that you don’t buy more home than you can afford, lowers your monthly mortgage cost, and can increase your chances of being approved for the loan. You also won’t have to pay private mortgage insurance.

When it doesn’t: 

While this is commonly accepted as practical advice, opinions can vary. Some consider 20% unrealistic as it’s an overwhelming amount to save.

The Income Rule 

Don’t buy a house that costs more than three years’ worth of your gross annual income. Some variations say no more than two years; others say two and a half.

Why it works: 

It puts a ballpark limit on how much home you can (or should) afford.

When it doesn’t: 

This rule doesn’t consider how much money you have in reserve, so it might make more sense to consider your net worth rather than your income.

And another factor would be living in a large city where houses are more expensive but still offer value long-term as an investment. These general rules give you an approximate amount to start with when thinking about homeownership.

But there’s a long list of expenses, including closing costs, to consider, too. And it all varies. Check out our list of homeownership expenses that you might overlook before you start looking.

5. Retirement: Top Money Rules of Thumb

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The 10% rule

“Save 10% of your income for retirement” is a very common rule of thumb.

Why It Works:

It gives people a simple number to work with. If you’re young, just opened a 401(k), and you’re not sure how much of your earnings to set aside, 10% is a good start.

When It Doesn’t:

While 10% is a simple rule to follow, the percentage doesn’t consider how much you’ll actually need in retirement. It also doesn’t consider how much you’ve currently saved. If you’re playing catch-up, you’ll probably need to save considerably more than 10% of your income.

Similarly, if you want to retire early, or more lavishly, you’ll likely need to save more than 10%.

The Income Rule 

You should save 20x your gross annual income.

Why it Works: It helps you focus on what you’ll need in the future.

When it Doesn’t:

It’s more of a common benchmark than a one-size-fits-all formula.

Your retirement expenses might differ from how much income you earn now, and depending on the lifestyle you plan to live, you may need a lot more (or less) than 20x your income.

These retirement rules offer ballpark numbers, but if you want a more accurate approach that considers all the variables, develop a detailed vision your retirement. Then, calculate how much that lifestyle will cost.

6. Student Loans: Top Money Rules of Thumb

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The First-Year Salary Rule

You shouldn’t take out more in Student Loans than you expect to make your first year on the job.

Why it Works: It ensures you’re taking out an affordable amount that you’ll be able to repay.

When it Doesn’t:

Skyrocketing tuition rates have made following this rule a challenge, as have unemployment rates right after graduation. This is a sticky and complicated topic. As we’re in the middle of a student debt crisis, not to mention a recession, it’s easy to dismiss this rule.

But it’s important to have a realistic idea of what your income and repayment are going to look like after college, especially as it relates to your major.

You’ll also want to compare the cost of an education at different universities to get a better idea of what you can afford.

7. Saving and Investing: Top Money Rules of Thumb

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The 6-month emergency fund rule 

You should have six months’ worth of savings on hand in case of an emergency.

Why it Works: Obviously, this is a big help in case an emergency arises in your life. It keeps you from having to make desperate decisions that can set you back.

Why it Doesn’t: There are many different opinions on how much you should saved, but as we know from the pandemic, even this may not be enough.

It’s can be really hard to hear “you should save an emergency fund” when you’re broke, so with that in mind here’s a Lifehacker post on alternative ways to get some emergency cash.

The Age Rule for Stocks

When investing, bonds are generally less risky than stocks. So the rule follows that the older you get, the less you should invest in stocks.

To put a number on it, subtract your age from 120 (the old rule was 100, but many experts now say 120 makes more sense); that’s the percentage of your portfolio that should be invested in stocks.

Why it Works: It gives you a general idea of what your asset allocation should look like, based on your age.

Why it Doesn’t: This rule doesn’t consider the incredibly low interest rates we have had to contend with in recent years. It also assumes your retirement based on your age. If you’re planning to retire sooner, you’ll need to adjust.

If you want to get a better idea of how much you should have saved in stocks and bonds, consider using an online tool like Portfolio Visualizer or Personal Capital to help you visualize your retirement planning.

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Most of these rules are pretty solid, tried-and-true methods for planning your finances. But again, personal finance is, well, personal. Consider these rules a good starting point—to really stay on top of your finances, research and personalized planning is a necessity.

a) Use 1–2% of an unexpected windfall for a treat, but bank the rest.

Whether it’s a gift, an inheritance, or an unexpected bonus, use just a small percentage to treat yourself right away. Put the rest in the bank, and give yourself a few months to think about the wisest way to spend that unexpected money.

b) Pay Yourself First. 

This is an old rule of thumb that helps you save, rather than spending all your money. Even if your budget is tight, as soon as you get paid, put some money into savings. Saving first, rather than last, means you’re much more likely to save money instead of spending it.

c) Add your raise to your savings account.

Once you’ve achieved a salary that funds a lifestyle you’re content with, don’t move significantly above that. When you get a raise, put it into savings rather than spending it. This can help avoid the problem of lifestyle inflation, while growing your savings significantly.

 d) When an appliance breaks, buy a new one if the appliances is 8+ years old or the repair would cost more than half the replacement cost. 

This goes for things like fridges, TVs, dishwashers, etc. Get an estimate on the repair cost. If that cost is 50% or more of the replacement cost, you’re usually wiser to just replace the broken appliance.

And for older appliances, you might consider doing the same even if the repair costs are lower. Older appliances are more likely to have subsequent issues with other parts.

a) Allot 2–10% of your budget for personal items.

This includes items like entertainment, getting your hair cut, and buying clothing, which would take up no more than about 8% of your monthly budget.

This is a flexible area, though, and you can always cut back if you need to save more money.

b) Try the 50/30/20 rule for budgeting.

If you’re new to budgeting, try allocating 50% of your take-home pay towards necessities (food, shelter, utilities, clothing, etc.), 30% towards lifestyle choices (vacations, gym fees, hobbies, cell-phone plans, etc.), and 20% towards financial goals and priorities (extra debt payments, savings, etc.).

This isn’t a perfect budget, but it can be a good place to begin.

 c) Spend about 10–15% of your budget on food.

This includes groceries as well as dining out. If you struggle to keep your budget within this range, find places to cut back.

d) Track at least your problem spending areas.

Some people like a very detailed budget.

Others, not so much. If you don’t want to track every line item, track at least those areas where you tend to over-spend, whether that’s dining out, buying new clothes, or spending on kids’ items.

This can help you control your spending without being bogged down by an over-detailed budget.

a) Aim to have your portfolio double about every ten years.

How do you know if your investments are on track and growing well? One rule of thumb is that your portfolio, if well-managed, should double about every ten years.

Your mileage may vary, of course, but if you’re not even close to doubling after a decade, consider rebalancing your investments.

b) Save three to six months’ expenses in an emergency fund. 

There are lots of different rules of thumb for this one, but this one makes the most sense for the most people. Remember, this is expenses not income.

And if you’re in a volatile field of work or the economy is in a downturn, consider saving eight or even 12 months’ worth of expenses.

c) Use the rule of 72 to determine how long it will take your investment to double.

To use this rule, divide 72 by the expected growth rate of your investments, expressed as a percentage.

If you expect to earn 10% per year, for instance, it’ll take you about 7.2 years to double your money.

a) Pay off your highest-interest debt first.

You’ll find lots of disagreement about debt repayment methods, but this is the one that will save you the most and get your debt paid off most quickly.

One time you might want to deviate: if you’re trying to boost your credit score quickly. In this case, first pay off any credit cards that are currently maxed out. Then, pay off debt from highest to lowest interest rate.

b) Put no more than 30–35% of your net income towards minimum debt payments.

This is the rule if you have a mortgage. If you don’t have a mortgage, then you should put no more than 30–35% of your net income towards both minimum debt payments and your monthly rent.

This is a somewhat high figure, and it’s always better to have even less of your income devoted to debt. But the 30–35% range is what mortgage lenders, in particular, will look at when considering debt-to-income ratio.

a) Plan for your annual retirement needs by calculating your current pre-retirement expenses, plus 10%.

Many rules of thumb say to aim to live on a certain percentage of your current income in retirement.

But if you’re saving a significant portion of your income and still living well, this may not make sense for you. Instead, use your expenses to calculate your annual retirement needs.

b) Save 10–20% of your income for retirement.

The old rule of thumb was to save 10% of your gross income for retirement. That seems to be a little low these days, especially for younger workers who may not have a pension to fill in the gaps.

Aim a little higher than that, especially later in your career, if you really want to be ready for retirement.

c) Subtract your age from 100; the resulting number is the percentage of your portfolio you should invest in stocks.

If you’re 50, for instance, you should invest about 50% of your overall portfolio in stocks. This is another rule of thumb that can vary greatly.

If you’re more risk-tolerant or planning to work and invest longer, you could bump this rate up. If you’re less risk-tolerant or want to retire early, you might consider a more conservative style.

d) Aim to save 1X your annual salary by 35, 2X by 40, 3X by 45, and so on.

This is a rule to help you see if you’re saving enough for retirement. If you’re far off of these numbers at the various ages, consider cutting your spending to boost savings.

e) Always take the employer match on your retirement account.

If your employer offers any match at all for retirement investments, save at least enough to get that match.

a) Limit your student loan borrowing to your first year’s expected annual salary.

To keep your student loan borrowing in check, do some research on typical first year salaries in your field. Keep your student loans’ total balance to this amount or, preferably, much less.

b) Save for retirement first, and your kids’ college expenses second. This is counterintuitive for parents who spend their lives putting their kids first.

But remember: your child can borrow, if need be, for college. You cannot do the same for retirement.

a) Don’t prepay a low-rate, deductible mortgage.

Deciding whether or not to prepay on your mortgage can be tough.

But, generally, if you’re already getting a good rate, you should use that money for other important financial goals. This is especially true if you’re talking about your primary residence, where the mortgage interest will be deductible on your federal income taxes.

b) Fix your mortgage rate for at least as long as you plan to be in your home.

Fixed-rate mortgages are the norm, for many reasons. But if you’re considering a variable-rate mortgage, make sure that the rate will be fixed for at least as long as you plan to be in the home.

Variable rates can make sense if you’re planning to move on in a couple of years. But even then, they can be dangerous, so just be careful.

c) Consider refinancing your home if interest rates drop by 1% or more.

The important piece of this rule of thumb is “consider.”

Refinancing is always a case-by-case issue, depending on how long you plan to own the home, your current rate, and how much the refinance will cost.

But if rates drop by 1% or more, you should at least take time to do the math on a refinance.

d) Put at least 20% down when you buy a home. This is a good idea for two reasons.

For one, it limits the total amount your borrow on your home, leading to significant savings over time. For another, it means you don’t have the added expense of private mortgage insurance (PMI).

Also, it makes you much less likely to go underwater on your home if the market has another major downturn.

e) Buy a home that costs no more than 2.5 to 3 times your gross annual income.

Again, this is a good way to limit your spending on your home, keeping things within an affordable range for you. However, it doesn’t take interest rates, taxes, and insurance into account.

If interest rates are high or your property taxes will be enormous, consider limiting yourself to just 2X your annual income.

a) Don’t spend more than 20% of your take-home pay on all costs for all the vehicles you own. 

This includes costs like insurance, plates, and maintenance, too. Again, this can seem limiting if you’re setting your sights on an expensive vehicle.

But limiting your total vehicle costs to 20% or less of your take-home pay will keep you from spending way too much on a depreciating asset.

b) To estimate the actual cost of owning a car over five years, double the price tag and divide that by 60. 

So if you’re buying a $10,000 car, it’ll cost about $333 per month for all its expenses, including plating and insurance.

c) Plan to buy used, or buy new and drive the car for at least 10 years. Generally, buying new isn’t the better financial option.

But if you can definitely drive the car for 10 years or more, buying new can sometimes be a decent financial investment.

d) Use the 20/4/10 rule if you must finance a vehicle. Your best bet is to pay cash for any vehicle. But if you must borrow, put at least 20% down.

Don’t finance the car for more than four years, and don’t put more than 10% of your income towards payments. This may limit your means to buy a nice vehicle, but it’ll keep you from making stupid decisions at the car lot.

a) Use insurance for catastrophic expenses, not basic ones. As with high-deductible healthcare plans, this is the way the insurance world in general is going.

Whether it’s car insurance or homeowners, you shouldn’t rely on your insurance to pay for expenses you can handle out of pocket.

This will only increase your deductible and your overall costs over time. Instead, look at insurance as a last-ditch back-up, rather than a financing plan for general life costs.

b) Have 5–6 times your gross annual salary in life insurance coverage. If you need life insurance, term is usually (though not always) the best bet.

When deciding how much term coverage to get, multiply your annual salary by five or six, and opt for at least that much total coverage.

If you have special life insurance needs, like multiple children or high amounts of debt, consider getting even more. If you don’t bring in an income but provide essential services to your family

Time To Memorize The Top Money Rules of Thumb

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Now, that we have gone into detail about all of the money rules, it is time to make them a normal part of your life.

You want the financial rules of thumb to become a natural part of how you make, spend, save, and invest money. The goal is to implement them without even thinking about it.

Are you ready for success? Then, these are where you start. Use these 10 rules to live by. Start here in making decisions. Just to recap the rules of money…

Top Money Rules of Thumb

1. Say No to Debt
2. Talk About Money
3. Have Money Goals
4. Learn From Mistakes
5. Pay Your Bills on Time
6. Don’t Have a Tight Fist
7. Spend Less Than You Make
8. Establish an emergency fund
9. Make a Plan For Your Money
10. Know Your Savings Percentage

There you go! At the end of the day, you will be grateful you did. The 10 Top Money Rules of thumb help guide your money situation on this journey of life. Don’t leave home without them! Top Money Rules of Thumb