We often say financial advice does not exist in a vacuum. Hard to argue with that statement, but there are very few concrete answers to the questions people have about money and investing. We’ll look at a few of the common rules, why they exist, and how they may or may not be relevant to everyone.


Emergency Fund

Emergency funds provide stability and flexibility when unforeseen expenses occur. Not having to turn to expensive debt options (like credit cards) can minimize expenses over the short and long-term. General rule is to maintain an emergency fund that covers 3-6 months of fixed expenses.


50-30-20 Rule When Working

This rule offers guidance for how to allocate your cash inflows while working to three main categories: Needs, Wants, and Savings. Of course, this is a general rule and may vary depending on specific circumstances at any one point in time.  

  • 50% of your money goes to your needs (housing, food, insurance, etc.), 
  • 30% towards your wants (vacations, dining out, clothing, etc.), 
  • 20% towards saving (employer retirement plan, bank savings, IRA/Roth IRAs, etc.). 


Pay Yourself First

Individuals are more likely to achieve their savings goals if they treat the goal as a fixed expense versus a discretionary or left-over item. Workplace plans and monthly funding of IRAs help make incremental progress vs requiring lump sums at the end of the year, which are easy to overlook.

There are times in life when it may be difficult to save the suggested 20% of income. At these times, contribute an affordable amount to savings. Going forward, every year, increase the amount you save into your workplace plan by 1%. The theory is you won’t notice much of a difference in each check, but could make a large difference each year. Some plans have a setting which auto-increases your contribution each year.


Rule of 72

This might be my favorite and it’s very helpful to anyone attempting to project what a pool of money might grow to. Specifically, how long will it take to double one’s investment.  

  • Divide 72 by your expected rate of return and the result is how long it will take for your investment to double.  (72/8 = 9 years)


4% Rule in Retirement

This rule offers guidance for how much to annually distribute from your invested assets during retirement. In general, drawing no more than 4% from your investment portfolio each year should preserve principal.

This rule does not take into consideration return sequence, investment allocation, and cash needs, which are significant variables and can have a dramatic effect on a portfolio.


Debt & Expense Ratios

Taking on debt is something that cannot be avoided for most individuals. The key is to have “good” affordable debt versus “bad” debt. Below are some general guidelines.

  • Limit student loan borrowing to the amount you expect to earn in your 1st year working.
    • Although this rule has it’s shortcomings, it’s a good idea to factor in future earning potential when considering taking on debt to advance one’s education and career.
  • Limit car loan payments to 10% monthly take-home pay.
  • House payment (including mortgage /rent, taxes, and insurance) should not exceed 30% of gross monthly income.
  • Total debt payments should be less than 36% of gross monthly income (we see this calculation in the mortgage lending formulas).

As you work to pay down debt, attention should be paid to the interest rate on each loan. To minimize long-term interest expense, pay down debt by order of interest rate; paying the highest interest rate down first.