They say change is the only constant, and it’s true.
With time, our circumstances and views can change. And our finances are rarely an exception.
My income and expenses, my financial knowledge, risk tolerance, and money beliefs have all changed in some form over the years.
However, despite all these changes, there are some good old money rules I follow. They are not absolute truths, of course, but serve as good rules of thumb I’ve abided by.
Today, I want to share some of my favorite “rules” that have kept me grounded and well-balanced in enjoying life and being financially savvy.
1. Always have an emergency fund
This first rule is said a lot, but it can never be overstated. In my financial philosophy, an emergency fund is a must.
Everyone needs a financial cushion that can hold them over when times are tough.
This number will be different for each person because our circumstances are different. But I think an absolute minimum for when you start an emergency fund is $1,000. If your car tire goes out, you want to be able to cover it without getting into debt.
The number I like to keep in an emergency fund is around 6-7 months of basic living expenses.
We define basic living expenses as being able to pay for rent, utilities, basic groceries, and any other essentials that help you stay afloat. Again, this will be different for everyone because your essentials can be certain medications, child care, car, etc.
So although my number may be around 6 months of living expenses, you may sleep better at night with a bigger cushion in your savings. It’s entirely up to you! As long as you know how much you need every month to make it work.
2. Pay off my credit card balance in full every month
This rule is so important, but I get that it’s a challenge for many people.
First, there are a lot of people who depend on credit cards to make ends meet, and circumstances are different. How the financial industry preys on these demographics is a whole other topic, so we will revisit this in the future.
But whenever possible, paying off our credit card balance should be a top priority.
Although I love credit cards, I believe it’s actually better to not have one than get in too much consumer debt. So if anyone is struggling with relying on credit cards too much, I recommend ditching it for a while.
Why?
A typical interest rate of a consumer credit card is over 20%, meaning any balance that carries over past the payment deadline continues to accrue interest at this rate! Credit card debt that isn’t controlled can singlehandedly trap a person in a cycle of debt.
3. Keep rent at under 30% of my takehome income
Have you heard of the 30% rule for rent?
If you haven’t, it’s a popular rule of thumb that says you shouldn’t spend more than 30% of your gross income on rent. Gross income is your before-tax money.
Many people nowadays disagree with this rule, and I do too.
According to this rule, someone making $65k should not spend more than $1,625 a month on rent. If I think back to when I was making around this much, I cannot imagine spending around $1,600 every month on just rent.
I know it’s not encouraging you to spend exactly 30%, but I think we can be even more conservative with the cap here. It’s especially helpful to be conservative when gross incomes don’t take into account how much we need to pay in taxes and benefits.
So I’ve tweaked the rule to keep rent (and utilities) under 30% of my take-home pay after taxes and 401k contributions.
I love this rule personally because it prioritizes retirement investments and keeps one of the biggest fixed costs lower. It ensures that I am not spending disproportionately on rent.
4. Increase my 401k contribution by at least 1% every year or at every raise
I have been fortunate to have a 401k through my employer since I started work, so since then, I’ve been increasing my contributions every year and with every pay raise.
There are three main reasons I like this rule:
1) It accelerates my retirement investments
2) It keeps my lifestyle inflation in check
3) It reduces my taxable income
I find that I don’t even notice a difference in pay with a 1% increase, so this rule feels easy. On the contrary, even upping our contribution by 1% can do a lot for our retirement funds in the long run.
It also keeps our lifestyle creep in check. Of course, some level of lifestyle upgrade is inevitable and even welcomed (raise your hand if you like to be boujee). As we get older, our expenses naturally go up, and we should get to enjoy the money we make.
But it’s also important to realize that our lifestyle upgrade is rarely proportional to our pay increase. How many times have we gone out for an expensive celebratory dinner only to find that our raise brings just $32.08 more per paycheck?
And that’s likely because if there’s anyone who loves a raise more than us- it’s Uncle Sam. That guy knows that I’m getting paid more before I do and will take a bigger slice of the pie.
So I’ve decided that I’m just going to put in more towards my 401k to put more money in my pockets (and not Uncle Sam’s), be in a lower tax bracket, and upgrade my lifestyle at a slower pace.
This rule is honestly a ‘Three birds with one stone’ deal.
5. Maximize my Roth IRA every year
Roth IRA is an honorable guest in almost every one of my posts.
I love the Roth IRA and recommend it to anyone who has not opened it (or has not invested since opening because they’re different steps!).
Even those who are over the income limit can increase their 401k or HSA contributions to still (potentially) contribute to the Roth IRA.
The reason I’ve committed to maxing my Roth IRA every year is it provides one of the best tax benefits, aka you don’t have to pay taxes on the money you withdraw after retiring.
The rich are always trying to pay less taxes. So why are we not taking advantage of the opportunities the same way?
6. Keep credit card utilization below 10% of my total credit limit
When I first opened my credit card, I had a misconception that the more I spend, the better my credit score would be.
Wrong.
This myth, which I’ve found a lot of people also believe, could not be further from the truth.
I still owe my first credit card knowledge to my college friend who randomly shared that the lower the credit utilization rate is, the better.
A credit utilization rate is essentially a percentage of how much you’re using against the total credit you have available. Experts generally recommend keeping your utilization below 30%.
For example, with my first credit card, I put a $750 purchase on my credit car that had a $1,000 credit line. Yup, that’s a 75% credit utilization rate.
What my friend told me though is that using even lower than 10% of the available credit is better for our overall credit score. And I’ve kept by this rule.
Many people (my younger self included) think that putting more on our credit card, aka “borrowing more”, will be better for our credit. It’s hard to believe that spending barely $100 on your credit card every month could do anything.
But it does!
Borrowing little and diligently paying off the balance builds up your credit score and increases overall credit limit in the long run.
And as silly as it is, America loves a good credit score.
What are your money rules?
There you have it- the six money rules that have set me up for success for the past several years.
No, I don’t have them written and framed, and I didn’t even consciously commit to these rules.
But I’ve realized that following these rules as general guidelines has been extremely helpful in keeping my financial health through all the changing circumstances.
While I don’t expect you to find every rule useful or applicable, I hope you’ve found one or two that you can try in your own life.
Additionally, I hope this inspires you to think about what money rules you’ve abided by or would like to commit to for your best life!
Food for thought today: what are your money rules?
