I stumbled upon this “Money Rules Cheat Sheet” during a late-night scrolling session, and it instantly caught my eye.
Initially, I thought it was just another oversimplified financial guide. But as I dug deeper, I realized these rules could be game-changers for anyone looking to get their finances in order.
Let me break down each rule and share how it impacted my financial journey.
Rule of 72: The Magic Number for Doubling Your Money
The Rule of 72 is a quick and dirty way to estimate how long it’ll take for your investment to double. Here’s how it works: divide 72 by your expected annual rate of return, and voila! You’ve got the number of years it’ll take for your money to double.
When I first learned about this, I was skeptical. But then I applied it to my investments. I had money in a high-yield savings account, earning about 2% interest.
Using the Rule of 72, I calculated it would take 36 years for my money to double (72 ÷ 2 = 36). That was a wake-up call!
I decided to explore other investment options. I found an index fund with an average annual return of 7%.
Applying the Rule of 72, I realized my money could double in just over 10 years (72 ÷ 7 ≈ 10.3). This discovery motivated me to diversify my investments and think more long-term.
Real-life application: Let’s say you’re deciding between two investment options. One offers a 5% return, the other 8%. Using the Rule of 72, you can see that your money would double in about 14.4 years with the 5% option but in only 9 years with the 8% option. This simple calculation can help you make more informed decisions about where to put your money.
Rule of 2000: Your Hourly Rate on Steroids
The Rule of 2000 is a quick way to estimate your annual income based on your hourly rate. Just multiply your hourly rate by 2000, and you have a rough estimate of your yearly income.
I remember when I first started freelancing. I was charging $25 per hour and felt good about it. Then, I learned about the Rule of 2000. I did the math: 25 × 2000 = $50,000. Suddenly, my hourly rate didn’t seem so impressive anymore. It was a reality check that pushed me to reassess my pricing strategy.
This rule is beneficial when you’re job hunting or negotiating your salary. When a potential employer offers you an hourly rate, you can quickly estimate what that means annually. It’s also handy for freelancers or gig workers who must set their rates.
Real-life example: A friend was offered a part-time job at $18 per hour. Using the Rule of 2000, we calculated that if it were a full-time position, it would equate to about $36,000 per year. It helped her negotiate better, as she realized the offered rate was below the market average for her skills and experience.
Rule of 25x: Your Retirement Number
The Rule of 25x suggests that you need 25 times your annual expenses saved up to retire comfortably. This rule gave me a clear target for my retirement savings and helped me understand the importance of managing my expenses.
When I first calculated my “retirement number,” it was a bit of a shock. My annual expenses were about $40,000, which meant I needed a cool million dollars to retire ($40,000 × 25 = $1,000,000). It seemed impossible initially, but a concrete goal helped me create a more focused savings plan.
This rule also motivated me to look critically at my expenses. If I reduce my annual expenses, I could lower my retirement number. It was a powerful reminder that saving more and spending less contribute to financial independence.
Real-world application: Let’s say you spend $50,000 annually. According to the Rule of 25x, you’d need $1.25 million to retire. But if you can reduce your annual expenses to $40,000, your retirement number drops to $1 million. This rule helps you see the direct relationship between your lifestyle and retirement needs.
Rule of 3x: Keeping Your Housing Costs in Check
The Rule of 3x states that the cost of your home should be at most 3 times your annual income. This rule hit close to home for me (pun intended) when I was house hunting a few years ago.
I earned $70,000 a year and had my eye on a beautiful house priced at $280,000. It seemed doable with some stretching, but then I remembered the Rule of 3x. According to this rule, I should look at homes no more expensive than $210,000 (3 × $70,000).
At first, I was disappointed. But as I thought more, I realized this rule protected me from becoming “house poor” – where all my money goes into my home, leaving little for other essential things.
Real-life scenario: A couple I know, both earning $50,000 each, were considering buying a $400,000 home. Their combined income of $100,000 meant their home purchase should be capped at $300,000 according to the Rule of 3x. They decided to look for a more modest home, which allowed them to maintain a comfortable lifestyle without being stressed about mortgage payments.
Rule of 20/4/10: Smart Car Buying
The Rule of 20/4/10 for car buying suggests putting 20% down, financing for no more than 4 years, and keeping total monthly vehicle expenses under 10% of your income. This rule was a lifesaver when I was tempted to splurge on a new car.
I saw a $25,000 car and thought I could afford it with a 6-year loan and a small down payment. But then I applied the 20/4/10 rule:
1. 20% down payment: I needed $5,000 upfront.
2. 4-year financing meant higher monthly payments than a 6-year loan.
3. 10% of income: My monthly car expenses (loan payment, insurance, gas, maintenance) needed to stay under 10% of my monthly income.
Crunching the numbers made me realize I was about to make a financial mistake. Instead, I chose a more affordable used car that fits these guidelines. The result? I had a reliable vehicle without the financial stress.
Practical example: If your monthly income is $4,000, your total monthly vehicle expenses should be at most $400. It includes your car payment, insurance, gas, and maintenance costs. It might mean choosing a less expensive car, but it ensures your vehicle doesn’t become a financial burden.
The Rule of 10x: Protecting Your Loved Ones
The Rule of 10x suggests that your term life insurance coverage should be 10 times your annual salary. This rule opened my eyes to the importance of adequate life insurance.
When I first married, I thought a $100,000 policy was more than enough. My annual salary was $60,000, and $100,000 seemed like a lot of money. But then I learned about the Rule of 10x and realized I needed to be more insured.
According to this rule, I needed closer to $600,000 in coverage. At first, it seemed excessive, but then I considered my mortgage, future children’s education, and providing for my family’s long-term needs if something happened to me. Suddenly, that more considerable amount made sense.
Real-world application: Consider someone earning $75,000 a year. The Rule of 10x suggests they should have $750,000 in life insurance coverage. It might seem high but think about it: if this person passes away, the insurance will replace their income for about 10 years, giving their family time to adjust financially.
Money Rules: Bringing It All Together
These rules aren’t set in stone but provide valuable guidelines for making sound financial decisions. They’ve helped me balance my present needs with my future goals, and I hope they can do the same for you.
Remember, personal finance is just that – personal. Use these rules as a starting point, but be bold and adjust them based on your situation. The key is staying informed, being proactive about your finances, and always learning.
Reflecting on how these rules have shaped my financial journey, I’m reminded that good money management isn’t about deprivation or complex strategies. It’s about making informed decisions that align with your long-term goals and values.
So, apply these rules to your life and see how they can help you build a more secure financial future. After all, isn’t that what we’re all aiming for?
Also learn these 19 rules about money, wealth, business, and sales from Alex Hormozi.
