Five weeks ago, I began the process of analyzing and rewriting Money Magazine’s 25 Rules to Grow Rich By as an exercise in examining the fundamentals behind some of the often-repeated statements on how to get ahead financially.

Below, you’ll find the rewritten list of rules. Each rule is linked to an article that describes the original rule from the Money article, the investigation of that rule, and the conclusions that led to a rewrite of the rule. After that is a discussion of this project in general, including what it taught me about the media and citizen journalism. As an addendum, I’ve also included Money’s original rules.

25 Revised Rules to Grow Rich By

Rule 1: For return on investment, using quality materials and a cohesive design provide the best returns on a home upgrade. Bathroom and kitchen upgrades add the most equity.
Rule 2: It’s worth refinancing your home only if you can reduce your overall costs including the added refinancing costs.
Rule 3: Go no more than two and a half times your income in overall debt to buy a home. For a down payment, only exceed 20% if you don’t think you can beat the interest rate in investments.
Rule 4: Your total housing payment should not exceed 30% of your net income. Total debt payments should not exceed 40% of your net income.
Rule 5: Never hire anyone to provide a nontrivial service for you if they cannot provide quality references.
Rule 6: All else being equal, the best place to invest is in an investment plan through your work benefits up to the full company match. After this, invest in a Roth IRA. Still have money to invest? Put it in a place that you can easily access in ten or fifteen years, like an index fund.
Rule 7: To figure out what percentage of your money should not be in stocks, sutract 30 from your age and then double that number.
Rule 8: Invest no more than 5% of your portfolio in your company stock - or any single company’s stock, for that matter - unless you are exceptionally well-educated on the company; even then, don’t go above 10%.
Rule 9: The only way you should compare mutual fund returns is by first subtracting the fees off the top of any fund; this will expose the true value of the fund.
Rule 10: Aim to build a retirement plan that contains 25 times the annual amount you want to have when you retire. So, if you want a total income of $60,000 each year when you retire, you need to have $1.5 million in your retirement account.
Rule 11: If you don’t understand how an investment works, do some research before you invest; don’t just write it off.
Rule 12: If you’re not saving 20% of all of your income in excess of $20,000, you aren’t saving enough.
Rule 13: Keep two months’ worth of living expenses in a bank savings account or a money market account for each person in your household. So, if four people live in your household, have eight months’ worth of living expenses.
Rule 14: Aim to accumulate enough money to pay for what four years of undergraduate tuition would cost for your child at the institute of your choice on the day he or she was born. The rest can be borrowed or covered when the time comes.
Rule 15: You should leave behind a year’s worth of life insurance to cover your funeral, plus two years’ salary for each dependent you claimed on your last tax return (including yourself).
Rule 16: When you buy insurance, compare the packages at multiple insurance providers with the highest deductible you can afford. It’s the easiest way to lower your premium.
Rule 17: The best credit card is a no-fee rewards card that can earn you at least 1.5% in return that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.
Rule 18: The best ways to improve your credit score is to pay bills on time, to reduce the balance on your credit cards, and to not cancel old cards when you’ve paid off their balance.
Rule 19: Anyone who contacts you at any time and requests personal information of any kind is a scam artist. You should initiate all contacts that require a personal information exchange.
Rule 20: The best way to save money on a car is to pay cash for a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.
Rule 21: Never lease an automobile.
Rule 22: When a new gadget or computer comes out, select the model you would like to buy, then wait three months for the price to lower. If you still want that model, buy it; if not, move on or select a new model and start a new three month wait.
Rule 23: Save money on airline tickets by buying early, comparing rates, and being flexible when it comes to carriers and options.
Rule 24: Don’t redeem frequent-flier miles (or points from any bonus program) unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles (or points) you spend.
Rule 25: When you shop for electronics, don’t pay for an extended warranty.

What Did I Learn?

What I expected to find is that all of the rules were actually based on some clear and comprehensible logic, as you would expect from an article produced by a widely-read mainstream publication on personal finance issues. Instead, what I found was a list of “rules” that was occasionally on target, but often led to ideas that were as fiscally unsound as can be.

What did I learn from this? First, I learned that you shouldn’t trust something simply because the mainstream media says it. If you’re considering making a major decision in your life based upon what you read in a mainstream news article, investigate it first! Go to other information sources for comparison and apply your own common sense.

Second, blogs can serve a critical role as an observer of the mainstream media. Although this has been shown again and again in the political realm (see the downfall of Dan Rather, if nothing else), it’s great to see that it works in any realm. Blogs can investigate the information behind a story and tease out the truth behind it, because blogs are fueled by passion above all. If it wasn’t for the passion, most of us wouldn’t be here.

Third, citizen journalism really works. If you research a topic, write it up, and post it, people will find it. Google is the most powerful thing on the internet; it enables the people who invest their time and energy into investigating media topics to connect with the people who are curious enough to search for items on the web. It is the new possibility of this connection between citizen journalist and reader that makes it possible to inform the world.

Beyond all of this, I learned quite a bit about the basics of personal finance, including some surprising miscues that many people make.

The Original Rules

Rule 1: For return on investment, the best home renovation is to upgrade an old bathroom. Kitchens come in second.
Rule 2: It’s worth refinancing your mortgage when you can cut your interest rate by at least one point.
Rule 3: Spend no more than two times your income on a home. For a down payment, it’s best to come up with at least 20%.
Rule 4: Your total housing payments should not exceed 28% of your gross income. Total debt payments should come in under 36%.
Rule 5: Never hire a roofer, driveway paver or chimney sweep who is going door to door.
Rule 6: All else being equal, the best place to invest is a 401(k). Once you’ve earned the full company match, max out a Roth IRA. Still have money to invest? Put more in your 401(k) or a traditional IRA.
Rule 7: To figure out what percentage of your money should be in stocks, subtract your age from 120.
Rule 8: Invest no more than 10% of your portfolio in your company stock–or any single company’s stock, for that matter.
Rule 9: The most you should pay in annual fees for a mutual fund is 1% for a large-company stock fund, 1.3% for any other type of stock fund and 0.6% for a U.S. bond fund.
Rule 10: Aim to build a retirement nest egg that is 25 times the annual investment income you need. So if you want $40,000 a year to supplement Social Security and a pension, you must save $1 million.
Rule 11: If you don’t understand how an investment works, don’t buy it.
Rule 12: If you’re not saving 10% of your salary, you aren’t saving enough.
Rule 13: Keep three months’ worth of living expenses in a bank savings account or a money-market fund for emergencies. If you have kids or rely on one income, make it six months’.
Rule 14: Aim to accumulate enough money to pay for a third of your kids’ college costs. You can borrow the rest or cover it from your income.
Rule 15: You need enough life insurance to replace at least five years of your salary–as much as 10 years if you have several young children or significant debts.
Rule 16: When you buy insurance, choose the highest deductible you can afford. It’s the easiest way to lower your premium.
Rule 17: The best credit card is a no-fee rewards card that you pay in full every month. But if you carry a balance, high interest rates will wipe out the benefits.
Rule 18: The best way to improve your credit score is to pay bills on time and to borrow no more than 30% of your available credit.
Rule 19: Anyone who calls or e-mails you asking for your Social Security number or information about your bank or credit-card account is a scam artist.
Rule 20: The best way to save money on a car is to buy a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.
Rule 21: Lease a new car or truck only if you plan to replace it within two or three years.
Rule 22: Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.
Rule 23: Buy airline tickets early because the cheapest fares are snapped up first. Most seats go on sale 11 months in advance.
Rule 24: Don’t redeem frequent-flier miles unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles you spend.
Rule 25: When you shop for electronics, don’t pay for an extended warranty. One exception: It’s a laptop and the warranty is from the manufacturer.

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #25: When you shop for electronics, don’t pay for an extended warranty. One exception: It’s a laptop and the warranty is from the manufacturer.

Most extended warranties merely serve to put more cash in the hands of overzealous retailers like Best Buy. They try to get you to get the “four year plan,” but most consumer electronics are designed right out of the box to last at least that long, as they’re designed now to last five to ten years before having significant problems.

So, the rule is correct in the general case. What about the specific case of the laptops, though? Should one purchase a laptop warranty?

A few years ago, the answer would have been an unequivocal yes. Laptops were in the process of moving from luxury items to essential workplace pieces and many laptop producers weren’t gearing up well for the market changes. Stories about faulty Dell laptop batteries and other things caused people to freak out and often demand laptop warranties, plunking down the extra cash.

Today, though, laptops have become a common consumer item. It’s crossed what I like to call the “Black Friday” threshold: if an electronic item is sold at almost every major outlet at a steep discount on Black Friday, it’s probably become a very common item and the manufacturers have geared up to meet market demands (and probably exceed them). It’s cheaper for the manufacturers to ensure some levels of quality right off the line, especially when they’re competing with other manufacturers; not only is reliability an important factor in the purchasing decision, but the return process is expensive for the seller. Better to spend a dollar or two more to make a more reliable device than deal with lots of defective reports once an item has reached a mass-market threshold.

Thus, I would chop off that final caveat and leave the basic rule in place.

Rule #25: When you shop for electronics, don’t pay for an extended warranty.

You can jump back to rule #24.

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #24: Don’t redeem frequent-flier miles unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles you spend.

Throughout this series, I have often criticized the rules on this list for either being far too limiting or being flat-out wrong. For once, I’m going to issue a big compliment to the list.

This rule is completely spot on.

In fact, the same holds true for any “points” program you might be in. If you can’t get more than a dollar per 100 points in the program, hold off on using the points.

Here’s the trivial edit to the rule:

Rewritten Rule #24: Don’t redeem frequent-flier miles (or points from any bonus program) unless you can get more than a dollar’s worth of air fare or other stuff for every 100 miles (or points) you spend.

You can jump ahead to rule #25 or jump back to rule #23.

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #23: Buy airline tickets early because the cheapest fares are snapped up first. Most seats go on sale 11 months in advance.

While this rule is generally true (the earlier you buy, generally the cheaper the ticket), there are a lot of other methods that are much better at improving your flight prices than this one. Take this list, for example, from how to buy cheap airline tickets on eHow:

STEP 1: Keep yourself updated on airfare wars by watching the news and reading the newspaper. Look for limited-time promotional fares from major airlines and airline companies just starting up.

STEP 2: Be flexible in scheduling your flight. Tuesdays, Wednesdays and Saturdays are typically the cheapest days to fly; late-night flights (’red-eyes’), very early morning flights and flights with at least one stop tend to be discounted as well.

STEP 3: Ask the airline if it offers travel packages to save money in other areas. For instance, is a rental car or hotel room available at a discount along with the airline ticket?

STEP 4: Find out whether the stated fare is the cheapest, and inquire about other options when speaking to the airline reservations clerk. If you’re using the Internet, check more than one Web site and compare rates.

STEP 5: Inquire about standby fares if you’re flying off-season. High season is a bad time to fly standby because most airlines overbook flights, making it difficult to find a spare seat.

STEP 6: Purchase tickets through consolidators, who buy blocks of tickets and sell them at a discount to help an airline fill up all available seats. Check the travel section of the newspaper under ‘Ticket Consolidators.’

STEP 7: Book early. You can purchase advance-ticket discounts by reserving 21 days ahead; book even earlier for holiday flights, especially in November and December. Keep in mind that holiday ‘blackout periods’ may prevent you from using frequent-flier miles.

STEP 8: Stay with the same airline during your entire trip to receive round-trip or connecting fare discounts.

Each of these “steps” are quite useful in reducing your airline costs, but that’s a lot of information for one simple rule. Thankfully, these rules codify into one simple statement quite easily: buy early, compare rates, and be flexible.

Let’s rewrite that rule.

Rewritten Rule #23: Save money on airline tickets by buying early, comparing rates, and being flexible when it comes to carriers and options.

You can jump ahead to rule #24 or jump back to rule #22.

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #22: Resist the urge to buy the latest computer or other gadget as soon as it comes out. Wait three months and the price will be lower.

This rule is absolutely true, but it often doesn’t really apply to gadget hounds who want the latest and greatest geek toys. Quite often, either the gadget is so popular that the price doesn’t lower (like the iPod, for example) or a new, “better” model comes out that replaces your original desire.

So what is a good gadget geek to do? The best method for buying gadgets and computers with your eye on your wallet is to merge this Money rule with the ten second rule. In essence, you should select your item as soon as it comes out and get ready to buy it, but then pause at the last second. And wait for three months.

This pause has the same effect as the rule above: it causes you to save money on the item as the price will often lower in the next three months. It also has another benefit: it causes you to really think about whether or not you want that specific item or not.

Sometimes, you’ll wind up deciding you don’t really want one after all. Either some obvious product flaws become apparent or your interest simply wanes. Other times, you’ll decide it simply isn’t worth the investment, or a better model has come out.

Of course, if you wait three months and you still want the model you chose at the price it currently sells for, you can buy with renewed confidence, because you’ve just done a complete gut check and passed with flying colors.

So, let’s rewrite this rule.

Rewritten Rule #22: When a new gadget or computer comes out, select the model you would like to buy, then wait three months for the price to lower. If you still want that model, buy it; if not, move on or select a new model and start a new three month wait.

You can jump ahead to rule #23 or jump back to rule #21.

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #21: Lease a new car or truck only if you plan to replace it within two or three years.

I’m absolutely stunned that a personal finance magazine would ever recommend a lease to its readers. A lease is merely a rental of a car too high-end for you to actually afford, so in the end you’ve dumped out a lot of money and received nothing in return.

Let me make this as clear as possible: the only time you should ever consider an auto lease is when image is more important to you than financial freedom. If that’s the case for you, then by all means, lease yourself a BMW or a Lexus.

Many people will defend leases by using diagrams to “demonstrate” that you’re actually getting more car value this way with a $500 payment each month than if you bought a lower-end car with that same $500 payment. Want to know what the difference is? After four years, the payments on the lower-end auto will stop, and you’ll keep the car. After two or three years with the lease, the lease will end, the car will go back to the dealer, and you’ll have nothing at all to show for it: no car to continue driving, no nothing. You’ll just have to go to the dealer and get another “value” lease.

As for me, I own my automobile and I plan on driving it payment-free for several more years. What will happen then? I’ll get a small trade-in value for it, hand over the cash I’ve been saving instead of making the payments, and walk off the lot with a late-model reliable automobile that’s completely mine from day one. No payments, no leases, no nothing.

Let’s even use the situation from the rule, that for some reason you plan on getting rid of the car in three years. You want to lease a 2007 Lexus GS 350, and you can get that lease for $581 a month. On the other hand, you can sign up to purchase a GS 350 for about $655 a month. Of course, both of these numbers are high, but I’m assuming if you’re considering a lease, you’re really poor at negotiating.

Now, what will you have in six years? The comparable 2001 Lexus GS 300 has a book value today of $21,000, with an original sale price comparable to the GS 350 today (in the range of $40 K), so let’s use that as a baseline. With the lease, you spend $20,916 for three years, then you return it to the lot to lease again, lease a 2010 Lexus for the same amount, spend $20,916 over those three years, and then have to go back to the lot again looking for a 2013 Lexus.

If you buy, you’ll make $47,160 in payments over those six years (about $6,000 total more than your leasing pal, or about $80 a month), but in the end you’ll own the Lexus, which will have a book value in the $21,000 range. Head to the lot with your leasing friend and both of you pick out a 2013 Lexus. You can trade yours in, knocking the cost down to about $20,000, meaning you can pay it off and own it in three years with payments less than your pal will be leasing his for for three years. At that point, you will have a free and clear Lexus and he’ll have nothing at all.

If you enjoy having no assets of your own, by all means, sign a lease. As for me, I’ll be rewriting that rule.

Rewritten Rule #21: Never lease an automobile.

You can jump ahead to rule #22 or jump back to rule #20.

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #20: The best way to save money on a car is to buy a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.

Here’s another rule that I almost completely agree with. Late model used cars are the best deal on the market, because they’re almost always cars that have seen their 24 or 36 month lease end while the buyer jumps up to a new car under another lease. Quite often, they’re in great shape, haven’t been driven all that much, and are set to be used for many years.

There is one minor quibble I have with this rule, though, and that’s the general suggestion to just “buy” such a car. Many people take this to mean that you should go to the dealership, pick out your car, and get a good deal on financing. In fact, what you should do is go to the dealership, pick out your car, and pay cash for it.

How do you do this? Once you pay off your car, keep making payments on it. Instead, put those payments in an account where you can’t touch them for a while. Keep driving your car until it’s junk, but keep making “payments” on them into a separate account. Eventually, your car will be ready for the slag heap.

Let’s say, for example, that you bought your car in January 1995 for $12,000 and thus had $300 payments for four years on it, so you sent in your last payment in December 1998. You kept making payments on the car, putting them into a savings account that bears 4% interest (you can easily beat that, but we’re using a low number here). You finally give up on your car in January 2006 and head to the dealership, where he offers you $1,000 in trade for the old car. How much of a car can you get right then and there, paying cash, and never having a payment on it? Try a $30,000 car… you can get a pre-owned Lexus free and clear, or pretty much anything else you might want.

A little bit of planning ahead completely changes the nature of the game. Let’s rewrite that rule.

Rewritten Rule #20: The best way to save money on a car is to pay cash for a late-model used car and drive it until it’s junk. A car loses 30% of its value in the first year.

You can jump ahead to rule #21 or jump back to rule #19.

The Simple Dollar is running a series in which we re-evaluate Money Magazine’s “25 Rules To Grow Rich By”. One “rule” will be re-evaluated each weekday until the series concludes; you can keep tabs on the action at the 25 Rules index.

Rule #19: Anyone who calls or e-mails you asking for your Social Security number or information about your bank or credit-card account is a scam artist.

This rule is on the right track, but it doesn’t go nearly far enough. The fact of the matter is that people are now constantly besieging us with requests for personal information, from Nigerian scam artists to cold callers looking for business. These people thrive on acquiring your personal information, because it has some value to them, either by itself or because it enables deeper contact and connection to you and your money.

As a result, I will newer share any personal or financial information with someone who has contacted me without my initiation of the contact. No credit cards, no account numbers, no Social Security numbers, no mother’s maiden name - nothing. Since I am not initiating the contact to relieve some need of my own, I have no reason to ever give away any of my most sensitive data.

Let’s even say for a moment that the business contacting me is “legitimate.” If that is the case, how trustworthy are they if they have a telemarketer calling me out of the blue and asking for information? If they ask for more than a mailing address, they’re asking for too much and I will never do business with that entity.

There are some information gathering mechanisms that are legitimate, but these typically aren’t seeking truly personal data on you. These include political polls and media rating programs. While I personally have no objection participating in these, you are giving away information at little or no cost that will cumulate in value for the caller, so do what you wish.

Let’s rewrite that rule.

Rewritten Rule #19: Anyone who contacts you at any time and requests personal information of any kind is a scam artist. You should initiate all contacts that require a personal information exchange.

You can jump ahead to rule #20 or jump back to rule #18.