Rewriting Money’s 25 Rules: A Summary

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.

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  1. Thanks for reviewing all these rules for us!

    Now what you need is two volunteers, one to follow the Money set of rules and one to follow your re-written rules. Whoever has more money at the end of a certain number of years will tell us which set of rules works best!

  2. Joe says:

    Fantastic set of rules Trent; if you don’t mind, I’m going to have one of our people reference it in a post tomorrow.

  3. dr kanth says:

    Thanks a ton for reviewing those rules. I very much agree on the bit about not blindly following the financial media. In your review of PF books, could you take a look at ‘the wealthy barber’ by David Chilton? I feel it’s a sound book but less preachy compared to the others. Would like to hear your views on it.

  4. Rob in Madrid says:

    I would add to number 8 no cares more about your money than you. Buy some classic investing books (anything written more than 20 years ago) if it’s still in print it’s worth reading.

  5. limeade says:

    I reviewed this article as well. It’s in my post, Play by the rules…? that I wrote a while ago. Nice take on them.

    -limeade

  6. Chris - 24 says:

    I was wondering if you could go into more detail on 401k vs. IRA investment. I think everyone understands that obtaining at least the 401k employee match is free money, but what considerations should you make between continuing to fund your 401k vs funding your IRA. If one were to assume they would exceed the income limits for a Roth in a few years, does it still make sense to open/fund one?

    Your blog has a great style, I look forward to reading it every day.

  7. lightitup says:

    Hello Trent, I would like to commend you for the article on 25rules to grow rich by. It was concise, timely and well thought out. I especially loved the rewritten rule especially on determining the percentage of my savings that should be in a stock portfolio. I believe it takes sheer determination to live frugally and invest wisely. In my country Nigeria, where an individual lives below $1 daily, one needs this kind of timely information. Within Nigeria, living expenses are lower in terms of basic necessities. I work with a multinational company and earn within the range of $20,000 – $35,000. I have worked for the past two years and I have been able to invest 90% of my monthly income within the stock market.

  8. Julie says:

    I’d amend #25 to include products that are later found to have significant problems. We bought our Neptune washer thinking we were getting top of the line. Four years later, there are tons of posts online about how they break down at year five instead of the fifteen that the manufacturer claims. The three year warranty is $80. The basic service call is $125.

  9. Matt says:

    Excellent set of rules, some of which have been previously handed down to me by the wiser older people in my life. Great for those starting out especially. Regarding investing money beyond your 401k match, i believe the roth is a better vehicle in that the tax savings is greater with roth depending on your retirement tax bracket. Please correct my if I am misled.

  10. rodgerlvu says:

    I would add to number 8 no cares more about your money than you. Buy some classic investing books (anything written more than 20 years ago) if it’s still in print it’s worth reading.

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