Rules are made to be broken, right? In the case of our Money Guy rules that is absolutely not the case, but there are some circumstances where breaking a Money Guy rule may be an option you are considering. After all, the Financial Order of Operations is not linear and you will find yourself going forwards and backwards and forwards again. Just like going backwards in the FOO, there may be some situations in life where it makes sense to bend or break a Money Guy rule. Here’s what you should be thinking about when it comes to some of our most popular rules and if you should ever consider breaking them.
Home-buying rules
Our Money Guy home-buying rules can be difficult to follow for those in high cost of living areas or first-time homebuyers. However, we have some flexibility built-in to the rules. First-time homebuyers can put down just 3% to 5% on their home, provided they are planning to be in the home at least 5-7 years and are keeping their monthly payment below 25% of their gross income. The rule for everyone else is to put down 20%, spend no more than 25% of your monthly gross income on housing, and plan to live in the home for at least 5-7 years.
These guidelines are meant to provide a framework for you to find an affordable home that gives you plenty of margin to pay for all of life’s other expenses and invest for retirement and the future. It does not mean that someone who spends 25% or less on housing is automatically doing great financially and someone who spends greater than 25% is in a bad spot. However, it can be said that your overall financial risk increases the more of your income you spend on a home.
If you do find yourself in a situation where you are faced with the potential of breaking our 25% rule, you will have to create margin or cutback in other areas to make up for the excess spent on housing. It is very possible for someone who lives in a high cost of living city to spend 30% on housing, invest 25% for retirement, and have enough leftover for all other expenses. But you may have to make some tough decisions. Maybe using public transportation instead of purchasing and maintaining a vehicle allows you to spend more on housing, or if you become a DIYer and constantly repair and fix things up around the house instead of hiring contractors, you can spend a little more on the mortgage. The bottom line is the housing rule can be bent, but may require sacrifices in other areas to do so. As a general guideline, if you are going to spend more than 25% on housing, you should also be investing 25% or more for retirement.
Car-buying rules
Our Money Guy 20/3/8 car-buying rule says you should put down 20% or more on any car you purchase, pay it off in 3 years or less, and ensure the combined monthly cost of all car payments is no more than 8% of your monthly gross income. While other financial influencers believe you should only ever purchase cars in cash, our car-buying rule gives flexibility for those struggling to buy reliable transportation in cash. This rule should not be used by everyone, and if you have the ability to pay for a car in cash, do so. Cars are quickly depreciating assets and car loans are liabilities that should be approached with caution.
We don’t believe in breaking the 20/3/8 rule to spend more on a car, but there are ways you can bend the 20/3/8 rule to buy more reliable transportation. If you put down more than 20% on the car you are planning to purchase, you are effectively able to buy a more expensive car. This should not be used as a loophole to buy a luxury car, but can be great for families looking to step up to a more reliable vehicle.
Student loan rules
When it comes to taking out student loans for college, you should keep your total student loans below your expected first year salary out of school. Student loans are especially dangerous because your dollars are so powerful when you are young – just check out our Wealth Multiplier Calculator if you don’t believe me. Those going into high-paying professions like doctors or lawyers have the flexibility to take out more in student loans, if required, but you should aim to take out as little student loans as possible.
Student loans may not feel like a big burden while you are in school and payments are deferred, but once you graduate, those monthly payments eat into how much you can save and invest for the future. You should always aim to keep your total student loans below your expected first year salary and take out as little in student loans as possible. There are many creative ways to pay for college and you don’t necessarily need to work full-time while in college to avoid a ton of student loan debt. In addition to scholarships and grants, many employers offer tuition reimbursement programs and schools offer work-study programs.
Investing rules
How much should you be investing for retirement? While that is a bit of a loaded question, as a general guideline, we believe you should strive to invest 25% of your gross income for retirement. If you started investing later in life, you may need to invest even more. Unlike some of our other rules, our retirement investing rule is a bit more flexible. In your 20s, it is phenomenal if you are able to invest 25% of your income for retirement, but not expected. Start investing whatever you can as soon as you can, even if it’s as little as $20 per month. Gradually increase your investing over time as your income grows and expenses change, aiming to invest 25% no later than 30.
There may also be years where you reduce your retirement investing from 25% to a much lower number. If you are in the messy middle in your 30s and happen to buy a home and have a child in one year, you may not be able to invest 25% for retirement that year – and that’s okay! While we would love for everyone to get the benefit of investing 25% every single year of their working lives, we realize that life happens and nobody’s path to financial success is a straight line. Your own financial success is not determined by whether or not your savings rate ever deviates, but by how quickly you are able to get back on-track and recover after unexpected financial events. Check out our resource “How Much Should You Save?” for a breakdown of what percentage of income your savings rate can replace in retirement. Our Know Your Number course can help you take it to the next level and determine what savings rate is appropriate for you based on your own goals, assumptions, and desired retirement age.
Our Money Guy rules are meant to be the financial guardrails that keep your life on-track. Rules don’t have tos feel restrictive and suffocating. We hope our rules give you the freedom and flexibility to make big financial purchases, like buying a home, car, or attending college, without feeling like your financial life is on a bad track.
