While many people see the interest in money as unimportant, money is very important.
What’s harder and more important than making a lot of money is learning how to manage it.
As Dave Ramsey once said
When it comes to money, age doesn’t matter. It’s the knowledge about money that matter the most.
Learning these money rules will save you from a lot of financial problems in your 20s, 30s, or 40s.
The 16 Money Rules
The 16 money rules everyone should learn by 25 are:
1. Pay yourself first
This is one of the most important money rules that’s misunderstood by a lot of people.
Many people heard it and preach it, but still pay themselves last. But what does it mean to pay yourself first?
I’ll summarize this rule by taking the concept from the Rich Dad Poor Dad book.
To pay yourself first simply means to allocate your money in the asset column.
By investing or saving your money, you pay yourself first.
To not pay yourself first means allocating your money to the expenses column first. That’s what most people do.
They spend most of their money buying cars, paying bills, and new phones. Then pay themselves last.
Paying yourself first doesn’t mean being irresponsible and not paying your bills. It simply means prioritizing yourself.
Get Inspirational and Powerful Tips to your Inbox
2. Keep a 6-month emergency fund
Corona and inflation proved the importance of saving. We live in a world where you can’t be certain of its future.
But you can prepare for bad possibilities. If you have multiple streams of income, you can lower it to 4 months.
But if you depend on your job only, you need to save. You can lose your job at any time for unknown reasons.
Your business can go down for more than 3 months. You can lose 50% in the stock market in hours or a day.
That’s why you need an emergency fund.
3. Budget using the 50/30/20 rule
The 50/30/20 rule is a simple budgeting method that splits your monthly income into three main categories.
This rule helps people manage their after-tax income. The three categories are:
- 50% for needs
- 30% for wants
- 20% for saving or paying off debt
This is the bare minimum. This will help you a lot in the future funding your emergencies and savings for retirement.
4. Divide your bonus into third
Earned bonuses are great, but we spend all/most of it on entertainment.
Forgetting that there are other important categories. I don’t mean canceling entertainment. A major part of living is enjoying.
But enjoyment that attracts misery after a short time isn’t enjoyment. Divide your bonus into third:
- ⅓ for fun
- ⅓ for retirement
- ⅓ for debt payment
5. Put a large percentage of your raises into investment and saving
This moves up your retirement date avoiding one of the worst inflation which is lifestyle inflation.
Lifestyle inflation can affect your mental health a lot.
6. Avoid high-interest debt
High-interest debt can get you into a lot of financial problems. Avoid it at any cost.
But if you have it, use the avalanche or snowball method to pay it off.
You can read more about the difference between Avalanche and snowball methods here.
7. Your home payment (mortgage, insurance, and interest) should cost less than 28% of your monthly income
The 28% rule says that you should avoid paying more than 28% on the mortgage payment.
Example: Let’s assume you earn $10,000 every month. Multiply that by 28% (0.28) and that’s the maximum amount of money you can spend on the monthly mortgage payment.
8. When buying a car, use the 20/40/10 rule
It’s a straightforward and effective rule to help car shoppers with their budgets.
According to the formula, you should make a 20% down payment on a car with a four-year car loan and then spend no more than 10% of your monthly income on monthly vehicle expenses.
- 20% down payment
- 4-year loan
- 10% of your monthly income on car monthly expenses
9. You should save at least 15% of your income for retirement
Aim between 10-15% of your pre-tax income each year. But lock at 15% in normal situations.
10. The percentage of stocks you should have in your portfolio is 100 minus your age
100 was the popular number, now people are using 120.
11. Exploit stock market long-term average return of 10%
The stock market is risky and yeah it was risky and it will continue to be risky.
But risk takers are money makers. Most people invest in stocks expecting short term ROI.
This type of mindset makes them lose most of their money. Choose long-term investment.
12. Use the 72 rule to know how long it will take your investment to double
This effective rule uses simple maths to tell you the time it takes for your investment to double.
Example: The stock market has an average ROI of 10%. 72÷10=7.27.2 years is the time your investment will be doubled.
13. The 4% rule
It’s a straightforward rule to follow. You can safely withdraw 4% of your retirement fund each year to adjust for inflation and never go broke.
Example: if you have $10 million saved for retirement. You can spend $400,000 in the first year of your retirement.
14. Your net worth should be equal to your age multiplied by your pre-tax income divided by 10
Example: if you are 30 y/o and have $200,000 in annual income. Then your net worth should be $600,000.
15. Before spending money, wait 24 hours
Ask yourself do I still want it after 24 hours? If you still want it, go ahead and buy it. This will save you a lot of impulse purchases.
This is one of the rules you need to master. We buy things thinking we want them just to find out later that we don’t need them.
16. Value time over money and experience over things
The last yet the most important rule you should remember. None of these rules matter if you don’t embrace this rule.
Money is important and you can get back the money you lost, but you can’t get back the time you lost.
Don’t spend your life chasing money without experiencing what life with money is.
Just in case you forget any of these 16 money rules. Here are the 16 money rules you should know:
- Pay yourself first
- Keep a 6-month emergency fund
- Budget using the 50/30/20 rule
- Divide your bonus into third
- Put a large percentage of your raises into investment and saving
- Avoid high-interest debt
- Your home payment (mortgage, insurance, and interest) should cost less than 28% of your monthly income
- When buying a car, use the 20/40/10 rule
- You should save at least 15% of your income for retirement
- The percentage of stocks you should have in your portfolio is 100 minus your age
- Exploit stock market long-term average return of 10%
- Use the 72 rule to know how long it will take your investment to double
- The 4% rule
- Your net worth should be equal to your age multiplied by your pre-tax income divided by 10
- Before spending money, wait 24 hours
- Value time over money and experience over things