Investments

Rule of 72 – This rule states that you can determine how long it will take money to double based on the interest rate.  Note that this applies to both the investing  and debt side of the equation.  So a fund of $100 at a 6% return will become $200 over 12 years (72/6).  Likewise a debt of $100 at 6% over 12 years will become a debt of $200 assuming that no payments are made. 

The 120 rule. To determine what share to your portfolio to invest in  invest in stocks and bonds, merely subtract your age from 120.  for stock and place the remainder in bonds.  So if your 60 years old then 60% of your portfolio into Stocks and 40% into bonds.    Some people will also use 110 or 100 for the subtraction yielding less money to be held in stocks.  This rule has become outdated.  I am not big on bonds as I haven’t made much money on them over the years. The 4% rule does call for some balancing using bonds but the threshold is low.  For example 20%  Read more on the 4% rule for the recommendations on how much to hold in bonds.

Budget

50/30/20 rule.  Take your net income after paying taxes and multiple it by 59% to take care of expenses.  30% of the take home is for your wants (desires) and 20% is for paying off debt or saving/investment.  

70/20/10 rule.  You may also hear of a variation of the 50/30/20 rule called the 70/20/10 rule.  70% of net pay is to take of expenses.  20% is for savings/investments and 10% for tithing (donations). 

Emergency Fund.  Save 6 months of expenses for emergencies like car repair,  loss of job, etc.

Retirement

The 4% rule –  The result of a study by William Bengen to determine how much money can be spent by someone retiring at 65 years of age and living for a 30 year period in retirement.  The study concluded  that a person could reasonably spend 4% of his or her portfolio and increase that yearly amount by the inflation rate that occurred in the prior year.  So for a $1M portfolio, the retiree could withdraw $40,000 the first year.  If the inflation rate for that year is 3% then the following year, the retiree can retiree 3% more or 1.03*40000 = $41,200 in year 2 and so on from there.   

We can also calculate how much money we need in for a retirement portfolio by multiplying the yearly expenses by 25.  So if I have 40,000 in yearly expenses then I am required to have a $1M portfolio.  If I spend $50,000 in retirement then it is suggested to have a portfolio size of $1.25M. 

The 90/10 rule.  Discussed in the Retirement Manifesto at https://www.theretirementmanifesto.com/introducing-the-90-10-rule-of-retirement/ who gives credit to the Rock Retirement Club https://www.rockretirementclub.com/.  The idea is that prior to retirement we spend 90% of our time looking at financial issues and 10% of our time looking at nonfinancial issues.  After retirement, we spend 10% of our time looking at the finances and 90% of our time looking at nonfinancial retirement issues.  This rule feels a bit forced like someone just trying to coin a rule to get attention.  The  idea behind the forced rule makes makes sense however.  We do spend move time looking at finances prior to retirement than afterwards.

FI Ratio.  Another contrived rule which I have come across in slightly different versions which all mean the same thing.   FI stands for Financial Independence in this case.   But the question is do you have more passive income than expenses.  For the FI Ratio, take the yearly passive income and divide it by the yearly expenses.  If the result is more than 1 then you are bringing in more income than your expenses.  Note that as a percentage, you would like to see the result be more than 100%.  I first saw this at the Retire By 40 site at https://retireby40.org/.  It is another “forced” definition begging for attention.  I include it here for completeness.

Real Estate

28%/38% rule – What house payment can you afford?  Multiply your monthly gross income by 28% and that figure must be greater than or equal to your PITI.  Principal, Interest, Taxes and Insurance.  It may also include the HOA (Home Owners Association) fee.  Check with the mortgage company.  That 28% is also called the front end ratio.  The other ratio that the mortgage company looks at is called the back end ratio.  This is the ratio of all your monthly expenses to your monthly income.  This includes the PITI from above plus all other expenses including car payments, utilities, student loans, …  These expenses must be no more than 38% of your total monthly income.  To calculate these ratios just take your yearly pay and divide it by 12 to obtain your monthly pay.  Multiply that result by .28 to obtain your front end ratio and take that same monthly income and multiply it by .38 to obtain your back end ratio.  

How much house?  A rule of thumb for buying a house is somewhere in the range of 2.5 to 4.0 times your annual salary.  So a salary of $50K means a recommendation for a house that sells between $125K and 200K

Rent vs Buy Decision.  From Paula Pant at https://affordanything.com/is-renting-better-than-buying-should-i-rent-or-buy/.   Divide the selling price of the house by the yearly rent (or total PITI payment).  If the result is above 20 then hesitate before buying.  If the result is greater than 25 then don’t buy unless you have strong nonfinancial reasons.  If the selling price divided by the yearly payments is greater than 30 then run.    Low price to rent ratios are good for buyers and high price to rent rations are good for renters.

1% rule – The monthly mortgage should be less than or equal to 1% of the sum of the purchase and repairs.  So a $100,000 house with repairs of $20,000 should  rent for no less than $1200 month.   Keep in mind this should be considered a back of the napkin sanity check which leads you to determine if you should do further due diligence.   This can be used as a guideline in both the buy and rent decision.

70% ARV.  ARV is the After Repair Value When fixing and flipping Real Estate, make sure that the cost to purchase along with the repair costs do not exceed 70% of the market value for the property.  For single family homes, we use the comps (comparables) pricing for similar properties in the same housing sub market.  

Expense Ratio for MF.  The rule of thumb is to look for an expense ratio of 50% as a sanity check on a multi family property  

Life Insurance

10-12 rule.  Your term life insurance should be about 10-12 times your yearly income.  So if you make $50K per year then you should have a policy for $500-$600K should you pass away and no longer can provide for your family.  Keep in mind that you should also have Life Insurance for both spouses even if one spouse provides care for the children on a full time basis.