It's super ok to not know what you're doing with money, in your teens & your twenties. Being a true money master takes patience most young people don't have. But by the “Big 3-0” - you definitely need to know these essential money rules.
1. The Budget Rule: 50/30/20
What does it mean? It is a standard budgeting method of taking your paycheck and distributing it as follows: 50% of what you earn goes towards your must haves: shelter (rent or mortgage payment), while 30% of what you earn goes to your desires: birthday vacation, a new car, and a shiny new pair of shoes, and 20% of what you earn goes to your GOALS: savings, investments and paying off credit cards.
2. The 72 Rule: How Long It Takes To DOUBLE Your Investments
True money masters decide where to invest by determining when their investment will “fip” or double.
They do this by dividing 72 by the growth rate of the investment – as a percentage amount. For example, how long does it take to double an investment with a 10% interest rate? 72 divided by 10 = 7.2, so it will take 7.2 years to double your investment if the option has a 10% interest rate.
3. The EF Rule: 3x to 6x
This is a more known money rule that basically states we should have 3 to 6 times our monthly expenses saved for emergencies. This money will tempt money master “newbies” everyday, in the beginning of your money mastery journey. This is because it is not easy to remember – it's ONLY for true emergencies. What is a TRUE emergency? It's unexpected & due immediately. They include: medical & vet bills and fat tires. They do not include: vacations or new cars.
4. The 300 Rule: Your Retirement Number
To figure out how much money you will need to maintain your comfortable lifestyle when you retire, you simply multiply your current monthly expenses by 300. If you have $7,000. a month in expenses (including rent/mortgage, utilities, food, toiletries, transportation, clothing, pet care, entertainment & recreation), you need $2.1M to retire (300 x $7,000.).
5. The New Car Rule: 20/4/10
When buying a new car with a loan (financing – not leasing), keep in mind: some cars hold value such as pickup trucks, SUVs and sports cars, but most cars depreciate with time. Therefore, you may want to stick to these guidelines: 20% minimum down payment, 4 years max for repayment, and the monthly car note payment should be no more than 10% of your monthly gross income. Buying a $50k new car and you make $50k a year? Consider $10k down payment (20%), a 4 year loan (max) and no more than $417/month car note (10% of $4,167.00 – your monthly gross income). FYI; gross = before taxes (net = after taxes).
6. Rent Rule: 3x
This one is easy! Your rent (or mortgage) should NOT exceed 3x your GROSS monthly income.
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