5 Finance Rules to Help You Build Wealth

When I graduated from college, I was fortunate enough to make a decent salary. However, I fell victim to lifestyle creep as I started to get promoted and make more money.

Shortly after, I started to think about using my money effectively to help build a better future. This is when I ventured into personal finance and started learning about how to save and grow money.

No one likes to follow the rules because rules are meant to be broken. But, when it comes to finances, you should adapt to rules early on in life to set your future for financial success.

Today I will go over four financial rules that helped me build wealth early in life.

1. Net Worth Rule

It's crucial for everyone to be constantly aware of their net worth. Net worth is how much money your assets are worth minus the total value of your liabilities. Simply put, net worth is how much money you have after paying off all your debt.

Well, how much should my net worth be? Honestly, there is no right answer because everyone’s lifestyle is different.

I’m personally a big fan of the net worth formula introduced to me by Thomas Stanley in his book The Millionaire Next Door. The formula states that your net worth is equal to your age multiplied by your pretax income and divided by 10.

For example, if Sally is 30 years old and her annual salary is $50,000, we would calculate her ideal net worth in the following manner:

(30 x $50,000) / 10 = $150,000.

I like this rule because it forces me to save more money and invest it to be able to catch up to my "ideal net worth".

2. 30% Rule

By far, the most expensive expense the majority of us have is rent/mortgage.

The 30% rule indicates that you should not be spending more than 30% of your after-tax income on housing. Rent plus utilities must be less than one-third of your income, or you will not accumulate wealth quickly.

You can achieve this by relocating and living in cheaper cities. If you can't, consider sharing a house with someone to save money.

This might be hard for some to achieve. However, any savings on housing will boost your overall savings bucket of money that can be used for investing.

3. 50/30/20 Rule

Creating a monthly budget sets you up for success because you determine where your money should go before it is spent. It allows you to figure out how much money you should allocate for savings and how much you can afford to spend on your lifestyle.

My favorite budgeting rule is the 50-30-20 rule. It states that you should allocate 50% of your income to essential spending, 30% to your needs, and 20% to your savings.

You should always allocate to savings first, before expenses. That is what you call paying yourself first, a concept I learned from Rich Dad, Poor Dad by Robert Kiyosaki. It is a simple yet powerful concept that separates the rich from the poor.

Preferably, you should have a surplus on a monthly basis that you can then allocate to another financial goal. If you have a negative budget, your spending will outweigh your income, which essentially puts you in debt.

In that case, you will need to either cut down on your expenses or find a way to increase your income. For instance, getting a higher-paying job or starting a side hustle.

4. 20/4/10 Rule

Buying a car is one of the things that everyone wants to buy as soon as they start to make money from their first job. It's usually a big purchase, as we tend to gravitate towards fancy new cars.

However, you want to make sure that the car you buy won’t put you in a debt spiral and that you can actually afford it. You can do so by following the 20/4/10 rule, so let's look into it.

The 20 stands for putting a 20% downpayment on the car. The 4 stands for financing the car for no more than 4 years. The 10 indicates that your monthly car expenses should not be more than 10% of your monthly income.

Using the same example from earlier, Sally, with her $50,000 salary, is looking to buy a Honda accord worth $18,000. By applying the rule, she needs to put down a downpayment of $3,600. She will finance the rest of the amount over four years. 10% of her gross income is roughly $420 per month that she can spend on car payment, insurance and gas.

Also, when buying a car, make sure you want to drive that car for the next 7–10 years. Ramit Sethi explains in his book, I Will Teach You to Be Rich, that one must own a car for at least 7 years to get the most value out of it.

If you plan on selling your car every 3–4 years, then you will be losing money.

5. Rule of 72

When investing your money in anything, you should know how long it will take for your investment to double in value. Knowing that timeframe will allow you to judge whether this is a good investment or not.

By utilizing the rule of 72, one can estimate the number of years it will take to double your investment amount based on the rate of return.

Using our example from earlier, Sally is able to save 20% of her annual income of $50,000. Thus, Sally saved $10,000. She wants to invest that money in the stock market, with an average return of 8%. How long will it take for Sally to double her money?

Using the rule of 72, you can calculate the time in this manner: 72/8 = 9 years. So it will take 9 years for the $10,000 to generate another $10,000.

Another way of utilizing this rule is to know how long it will take to double the amount of money you pay in interest. Say Sally owes $6,000 on her credit card with an interest rate of 24%.

Utilizing the rule, 72/24 = 3. It will take 3 years for Sally to double the amount of money she owes to the credit card company.

Bottom Line

Following these rules will help you take control of your finances. If you want to have a positive net worth and not live paycheck-to-paycheck, you should keep these rules in mind and start to implement them.

If you do, you will be setting up your future for financial success and will accumulate wealth a lot faster.