Recently, I had the opportunity to read and reflect upon an article in Money Magazine entitled 25 Rules to Grow Rich By, a brief piece outlining 25 basic financial principles that should, in theory, bring about financial success. As a young person looking to build the foundations of a financially successful life, my first read-through of the rules made me reflect on my own lifestyle in relation to each rule. Was I following that rule? Was I really following this one?
But as I thought about them, I began to wonder how valid each rule really was. Were they actually sound financial rules, especially for someone in my shoes? Or was it just an off-the-cuff article, not really meant to be taken seriously? I began to wonder, so I began to consider them more carefully and to dig a little deeper. What I found was a lot of accuracy, but the accuracy varied depending on the audience of the article.
Over the next twenty five weekdays, I’m going to evaluate each rule in detail, discussing mostly the pros but also the cons. The perspective that I’m going to use is generally my own (with a bit of additional fact-based research), meaning that I’m looking at this list through the eyes of a twentysomething who is climbing out of debt and has (most of) a lifetime of financial choices still to be made. Which rules apply to me now? Which ones will apply in the future?
If you want to keep tabs on this series, bookmark this post. I will be using it as a table of contents for the series, adding each rule to the list below as I post it. At the end of the series, this post will tie together extensive reflections on Money Magazine’s 25 Rules to Grow Rich By.
So, let’s start wandering down the yellow brick road together, shall we?
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.