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.

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.

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.

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.

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.

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.

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.

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.

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.

In the United States, the most common type of credit score is the FICO score (or Fair Isaac Corporation score). From the Wikipedia credit score entry:

Although the exact formulae for calculating credit scores are closely guarded secrets, Fair Isaac has disclosed the following components and the approximate weighted contribution of each:

* 35% punctuality of payment in the past (only includes payments later than 30 days past due)
* 30% the amount of debt, expressed as the ratio of current revolving debt (credit card balances, etc.) to total available revolving credit (credit limits)
* 15% length of credit history
* 10% types of credit used (installment, revolving, consumer finance)
* 10% recent search for credit and/or amount of credit obtained recently

Money’s rule seems to directly address the first two: pay your bills on time to reduce late payments, and reduce your credit card debt to improve your debt ratio. But where does that 30% number come from?

The fact of the matter is that there is no specific number that qualifies as a “good” ratio, just that lower is always better. Different reporting agencies use different formulas to calculate a “good” and a “bad” debt ratio and don’t disclose the actual contents of the formula, leaving you to guess what is best.

In short, you shouldn’t necessarily feel good if your credit ratio is below 30%. You should feel good if your credit ratio is lower now than it was six months ago, as every time you decrease your ratio, you help your credit score.

Another tip is that by canceling credit cards, you’re actually hurting yourself in two ways. First, you’re reducing the total available revolving credit that you have without reducing the amount of current debt you have, thus raising your credit ratio. Second, by eliminating lines of credit, you’re shortening your credit history. Simply put, if you’ve already got a credit card and paid it off, don’t cancel it; put it away somewhere safe.

Let’s rewrite that rule.

Rewritten 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.

You can jump ahead to rule #19 or jump back to rule #17.

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.

This rule is absolutely correct in that you should be using a rewards card with no fees and you should be paying off the balance every month. There’s pretty much no other way to use credit cards without a significant loss.

However, this rule is not quite specific enough. It ignores the fact that many rewards cards are just not all that rewarding. The offers sound pleasant, but often you earn 1% or less return on the rewards and many rewards programs are nearly useless for the vast majority of users.

The fact of the matter is you should expect at least a 1.5% reward in a form that you will actually use. If you’re getting below that, I can virtually guarantee that there are better rewards programs out there for you.

I usually use the CitiBank Driver’s Edge Platinum Select card as a baseline for my rewards card comparisons. You earn a 6% rebate on supermarket, drugstore, and gas station purchases in the first year (3% after that), and 1% on all other purchases, plus a $1 rebate on every 100 miles you drive (which you prove using maintenance receipts). These rebates aren’t directly in the form of cash, but are used when you do maintenance, service, or repair on the vehicle assigned to the card. You can also get the rebate if you buy a new car in the next five years. In short, if you perform regular maintenance on your car or acquire a new one, this card will pay for a solid portion of it.

If a credit card offer can’t exceed this one (and not many can), you shouldn’t be using that reward program. Let’s rewrite that rule.

Rewritten 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.

You can jump ahead to rule #18 or jump back to rule #16.

Rule #16: When you buy insurance, choose the highest deductible you can afford. It’s the easiest way to lower your premium.

I flatly agree with this rule.

…

Of course, when I look at it again, I realize that it’s not including the other big factor in ensuring a low premium: taking advantage of the competition. Insurance carriers are always competing for customers, so there’s nothing but upside for consumers to take some time to review the offerings from other insurance companies.

This is especially true in the internet era, where you can quickly obtain rate quotes from many different insurers with only a mouse click. While the savings that you can obtain from a higher deductible is usually sizeable, combining it with the insurance provider with the lowest rates will usually move money out of the coffers of the insurance giants and straight into your pocket. Let’s rewrite this rule.

Rewritten 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.

You can jump ahead to rule #17 or jump back to rule #15.

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.

I agree with the spirit of this rule: most people don’t leave behind nearly enough life insurance to ensure the continued success of their family after a tragedy. To me, not having adequate life insurance is a classless act – you’re making a potential tragedy worse by being greedy now.

I also agree with the sentiment about leaving behind more life insurance if you have children, but this is where the rule gets quite vague. What does “if you have several young children” actually mean? It’s a very vague statement that makes me sit back, stroke my chin, and whip out my trusty pencil.

First of all, life insurance should cover your funeral and estate management right off the top. To ensure that everything is taken care of, you should have a minimum of a year’s salary put away. Even if you live entirely alone, this should exist to eliminate any burden you might put on other family members in the event of your passing.

Life insurance becomes important as soon as you begin to build your own family. If your income is even slightly responsible for the well being of anyone else, you need to put away two more year’s worth of salary in insurance to cover the hardships that would overcome them simply recovering from your loss. Beyond that, you want each person dependent on you to be able to continue to live something approximating the life they’re accustomed to, so you should have two years’ worth of insurance for each other dependent as well.

These suggestions add up to a very nifty formula for figuring how much life insurance you should have. Take the number of dependents in your household, double it, and add one. Multiply that number by your annual salary and that’s the approximate number you should be looking at. Let’s rewrite this rule.

Rewritten 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).

You can jump ahead to rule #16 or jump back to rule #14.

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.

This rule is utter rubbish. Let’s say that you have a newborn child today. How can one reasonably estimate what the cost of higher education will be in eighteen years? The simple fact of the matter is that you can’t, and thus this rule is nonsensical. We know that the cost of education will grow over the next eighteen years. We just have no idea how much.

There’s also a massive difference between the cost of your local state school and the cost of a top-notch private institution. Which do you think your child will be attending? For my parents, they didn’t believe I would attend college at all. For me, I want my child to attend the best school that he can get into, so I’m saving assuming that he’s going to MIT.

So, I check MIT’s financial aid site and it reports that the cost of undergraduate tuition per year right now is $33,600. So, in order to pay for four years of tuition at today’s cost, I’d have to cough up $134,400.

On the other hand, what if I were to send him to the local state school? The cost is about $6,000 a year for in-state tuition. So, to pay for four years there, I’ll have to save $24,000. Right now, I’m saving with a target amount between these two boundaries.

What about room and board, living expenses, and the tuition rise between then and now? I’ll deal with those when the time comes, but for right now, I have a tangible and sensible target to work towards, rather than an arbitrary number. So, let’s rewrite that rule.

Rewritten 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.

You can jump ahead to rule #15 or jump back to rule #13.

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’.

This is an appropriate rule #13, as it covers a scary situation that most of us don’t want to think about: emergencies. What will happen if you lose your job? What will happen if the transmission dies in your car? What will happen if you get spinal meningitis? These seem like unlikely things, but eventually something disastrous will happen and you need to be prepared.

This rule is a solid one, but it doesn’t cover every situation. For example, larger households should have more than six months of living expenses in the bank, while single people can get by with as little as two months. Why is this? A household includes people that are entrusted with the responsibility of keeping a child (or children) safe and secure, and the more people in the household there are, the greater the likelihood that an unexpected event could happen.

In short, if you have a large family, you want to be sure that even if two or three bad things happen at once with different family members, you’re fine. That’s why it makes sense to have a certain amount in an emergency fund for each family member, so that your emergencies won’t affed them and vice-versa.

How much is appropriate for each person? Three months is nice, but it is not quite necessary to have a year’s worth of living expenses sitting around for a couple with two kids, plus three is a little bit high for a single person, anyway (unless they like the security blanket). Two months of living expenses per household member is a much better balance of security and reality. So, let’s rewrite that rule.

Rewritten 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.

You can jump ahead to rule #14 or jump back to rule #12.

Rule #12: If you’re not saving 10% of your salary, you aren’t saving enough.

This rule has more class bias in it than almost any other rule on this list. It completely ignores the realities of the working class and of the lower middle class and lets the upper middle class, who really should be saving more than 10% of their salary, off the hook.

For example, a single mother who brings home $20,000 a year is supposed to be saving $2,000 of that? The simple fact of the matter is that she can’t and it’s dangerous for the living situation of her and her child if she tries. There is no money to shave off in that situation; the mother’s focus should be in ensuring healthy food and good education for that child so that child isn’t stuck in the same situation. If that mother can sock away a few dollars, that’s great, but saying that anything less than $2,000 isn’t enough is ignoring the economic reality.

On the other hand, let’s look at a married couple bringing in $240,000 per year. Should they only be saving $24,000 a year? They should be saving a lot more than that – if not, they’re spending at a frightening rate and will be working until very late in their lives. Their savings and investments should be exceeding $40,000 a year, easily.

How can both realities be reconciled into a single rule? It’s quite easy, actually; there should be a minimum threshold for living, then above that you should be socking away about 20% of what you bring in for a rainy day. In today’s world, that bare minimum is probably in the $20,000 a year range, but it might be a bit higher than that and will be higher very soon.

Let’s look at an intermediate situation. If a couple brings in $100,000 a year, the Money Magazine rule states they should be saving about $10,000 a year. At that rate, to continue their $100,000-level existence at retirement, they’ll have to work until they are in their seventies. Under the revised rule, the couple would have to save 20% of $80,000, or $16,000 a year. This is a much more healthy target that enables them to retire much earlier and there’s only a $6,000 a year difference, an amount that can easily replace a vehicle payment or a latte each day.

So, let’s rewrite that rule – for now:

Rewritten Rule #12: If you’re not saving 20% of all of your income in excess of $20,000, you aren’t saving enough.

You can jump ahead to rule #13 or jump back to rule #11.

Rule #11: If you don’t understand how an investment works, don’t buy it.

The sheer hubris of the above statement is incredible. “Leave the real money makers to the experts; you go along and play with your savings account at your local bank, junior.” It’s typical of the attitude of many people in the financial sector as they try to play Prometheus, bringing the fire of financial knowledge from the gods of Wall Street.

The fact is that most investments are not all that complicated. If you are interested in a particular investment, pick up a book at your local library (or your local bookstore) and read about it. This is an opportunity to learn something that could be directly useful to your pocketbook, not an excuse to run for the hills like a coward.

I agree that you should never buy an investment that you don’t understand, but merely saying, “I don’t understand it, so I’m not going to buy it” is a losing philosophy. You’re much better off saying, “I don’t understand it, so I’m going to learn about it.”

Let’s rewrite that rule:

Rewritten Rule #11: If you don’t understand how an investment works, do some research before you invest; don’t just write it off.

You can jump ahead to rule #12 or jump back to rule #10.

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.

In terms of the actual calculation, this is spot-on: if you want an annual income from a retirement account, you need to have 25 times that much in the account to have that annual income last in perpetuity with inflation adjustments. This is because a well-invested retirement plan should earn 4% plus the rate of inflation, so if you withdraw that 4% each year, your balance will go up by the amount of inflation.
The only caveat is that it assumes that you’ll have additional sources of income in retirement, such as Social Security and a pension, options that might not be available when Generation Y makes it to retirement. I have no faith in Social Security or a pension, so what do I do?

The answer is to put enough in your retirement plan so that you’ll have 25 times the annual income you’ll need in the account when you retire. Let’s say you want an overall income of $60,000 in retirement. That means that you’ll need to have $1.5 million in retirement. That seems like a lot of money, but if you start young, it’s easily attainable, especially if you have company matching available to you. Plus, if you do have Social Security, it’s gravy on top of the mashed potatoes.

There is one additional part that you need to consider, though, when using such a rule: it does not account for inflation. If you really need to know what you’ll need per year when you retire to maintain the salary you have now, you need to increase that amount by the rate of inflation (figure 3.5%) for each year between now and retirement. If it’s a long time until retirement, then you’ll definitely need to increase your estimations.

Given that caveat, let’s rewrite the rule.

Rewritten 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.

You can jump ahead to rule #11 or jump back to rule #9.

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.

As soon as I start seeing arbitrary numbers, flags start going off. On what basis do these numbers exist? What if you find a large-company stock fund that beats the S&P 500 by 2% but charges a fee of 1.3%? This rule says that you should never invest in such a fund, but I, for one, would invest in that fund immediately.

The truth of the matter is that there’s a much easier way to determine whether a fund is worth investing in or not. Do your homework. Before you even think about investing, know what is in the mutual fund and how it compares to common indexes (both general and specific).

If you want to compare some numbers, all you have to do is just subtract the fees from the rate of return and use this as the basis of comparison. If a fund charges a high fee but has a stellar track record, don’t be afraid to invest in it; however, if you can beat a mutual fund with a tiny fee by investing in an index fund, there’s no reason not to go with the index fund, even though Money’s rule “allows” you to invest in that mutual fund.

In short, the numbers tell you what you need to know; there’s no reason to remember silly metrics such as these. Let’s rewrite the rule.

Rewritten 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.

You can jump ahead to rule #10 or jump back to rule #8.

Rule #8: Invest no more than 10% of your portfolio in your company stock – or any single company’s stock, for that matter.

I like to refer to this as the “Enron rule,” as the reason for this rule was made painfully clear by the collapse of Enron and the resulting loss of the retirement plan of thousands of former Enron employees.

This also happens to be the first rule that I strongly agree with. In fact, I don’t think this rule goes quite far enough, especially for new investors. I will personally never put more than 5% of my stock holdings in one single stock, but that’s mostly due to the fact that I’ve watched multiple companies that I thought were rock-solid and set for long term growth go completely out of business in less than a year.

The fact of the matter is that no situation is foolproof and, unless you intimately know the inner workings of an organization, you should never put more than 5% of your portfolio in that company in the long term. Let’s just subtly edit that rule, shall we?

Rewritten 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%.

You can jump ahead to rule #9 or jump back to rule #7.

Rule #7: To figure out what percentage of your money should be in stocks, subtract your age from 120.

This is an old, old rule that has been around in some form since my grandpappy was in diapers; back then, you were told to subtract your age from 100.

But let’s think about this for a minute: according to this rule, at age 70, you should have 50% of your investment in stocks? That seems rather risky to me, as you should want a high degree of stability during your twilight years.

On the other hand, why would investors under 30 want to invest their money in low-return things (unless it is for liquidity purposes, of course)? If an individual is looking at the vast majority of their life still ahead of them, why not invest everything in an index fund that will return tremendous amounts in the future?

This rule is a nice little rule for people in middle age, but it doesn’t take into account the oldest or youngest investors who should either be maximizing or minimizing their risk based on what their futures hold. Let’s rewrite this rule so that it encompasses everyone, then:

Rewritten 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.

You can jump ahead to rule #8 or jump back to rule #6.