Getting money and investing right can be overwhelming, I know, but the upside of financial freedom is so huge. So today I'm gonna break down 25 investing and personal finance rules of thumb that will make managing your money simpler and more effective. From the rule of 72 for doubling your investments to the 4% rule for early retirement.

These principles will help you make smarter financial decisions and grow your wealth with a lot less stress. Plus, me and best-selling author Brian Feraldi are also gonna cover when it's important to break some of these rules. I'm Chris Hutchins, this is "All The Hacks" and a big favor before we jump in is to give us a quick thumbs up to help others find this channel.

And if you're new here and you wanna keep upgrading your life, money and travel, consider subscribing. Brian, why do you think that personal finance and investing are just so hard for so many people? - It is a very complex topic and it is filled with mountains of data, but more important, mountains of emotions.

And I think that everybody has their own unique experience with money. We grow up in different types of environments, we grow with different types of parents and different types of role models to look to. And as a big part of that, historically, money, personal finance and investing, they haven't been subjects that have ever been taught in school.

A lot of schools have basically said, "You're gonna learn this from your parents "and you're gonna learn this from outside of the classroom." So because of that and because it's such an important topic that is emotionally charged, I think it is a very easy topic to have a lot of different opinions on.

- That's why I'm really excited about this conversation because it can be complicated and I would love everyone listening to go become an expert and be able to uncomplicate it. But there are a bunch of rules of thumb out there, some of which are good, some of which are bad.

And I thought it'd be good to just run through them to kind of make some of this easier. And we can give our feedback on them. Not all of them are ones that we're gonna tell you you should be using, but you put together a great list. I went and sourced some from myself, ChatGPT, the internet to kind of make as much of a comprehensive list as I could of the rules of thumb of investing in personal finance.

So what do you say we go through them and see where it goes? - Absolutely. And to your point, I absolutely love rules of thumb. I love rules in general. And I think that if you're a beginner on a subject, it's essential to know the rules. As you get more educated about that subject, it's more important to know when to break the rules.

- Yes, and I think no matter where you are in that journey, this conversation will be interesting 'cause we're gonna talk about both the basics and when to break it and how we do them ourselves. So the rule I wanna start with is probably the one that of this entire list I kind of have heard for the longest, and that's the rule of 72.

- So this rule is a calculation that lets you figure out how long it will take approximately for your money to double when invested at a specific interest rate. So the rule of 72, you simply take the number 72, divide it by the interest rate at which you are expected to grow your money.

That will give you the time period in years at which your money will double. So as a quick example, let's say you invest your money at a 10% interest rate. If you take 72, divide it by a 10% interest rate, that gives you 7.2, meaning that in 7.2 years, you can expect your portfolio to double at that interest rate.

- If you were to invest at 5%, which kind of right now, treasury rates are at, you know, about 14 years to double. And when I looked at this rule, I was like, interesting, there's also a rule of 70. - Yeah, the rule of 70 also is similar to the rule of 72.

And this actually applies more to the purchasing power of your investment. So everybody knows that every year, the inflation rate erodes the purchasing power of your dollar, which is a big reason why you should be investing in the first place. And the rule of 70, very similar to the rule of 72, and it effectively tells you how long in years it will be before the purchasing power of your portfolio is halved.

- If we have inflation at 3%, then in 23 years, you're gonna end up with kind of half the purchasing power you had. - For anyone mathematically inclined here, the point at which your purchasing power has eroded in half is the point at which inflation has effectively doubled your base.

So it's the same thing. And it turns out the reason why I think the rule of 70 is different is purely that it's a different thing, right? They're talking about inflation eroding purchasing power, so it needed a different number. But the reason the rule of 72, which I think is older than the rule of 70, wasn't originally the rule of 70, was actually, best I can tell, because 72 is more divisible simply by more numbers.

Two, three, four, six, eight, nine, 12. It's just an easier number to work with. But it turns out that the rule of 70 is a little bit more accurate. And so for, you could take 70 or 72, the numbers are gonna be about the same, but they both kind of effectively do the same thing.

How do you use this rule? I mean, I understand what it tells you, but how could someone apply this to their life? - The way that I think it's most useful is you take your current age and you subtract that from the year 65, which 65 is the quote unquote standard retirement age that a lot of people aim towards.

So I'm 40. If we took 65 and subtract that, that would get me, that means that in 25 years, I have to, I am going to retire. And I wanna know, well, how many times will my current portfolio effectively double in value over that time period? So if I'm aiming for a 10% return in my portfolio using the rule of 72, that tells me that every seven years, I can expect the value of my portfolio to double.

So I can expect during that 25 year time period, if I'm roughly correct, about three doublings of my portfolio. So seven years from now, it'll be a 2X. 14 years from now, it'll be a 4X. And 21 years from now, it'll be an 8X, the value of my portfolio.

I think that's a very good, easy mental calculation that I can do to figure out, well, how big will my portfolio be in so many years? - Yeah, that makes sense. And I guess if you were to just take the interest rate minus inflation, you'd figure out what your, and then use it against the rule of 72.

So let's say 10% minus 3% inflation, then it would take you 10 years to double your purchasing power. - Which I would argue is even more important than doubling the value. It's not necessarily the absolute dollars that matter. It is what you can use those dollars or what you can purchase with those dollars.

So I think that's a great way to do it. And don't forget to account for inflation. That is something that you absolutely have to think about, especially when it comes to your money. - So let's jump into some rules that apply to a investment portfolio and start with the 110 rule.

- The idea here is you take your age and you subtract it from the number 110. The answer there will tell you what percentage of your portfolio you should keep in stocks or equities. The remainder should be in bonds or cash. So as an example, if you are 40 years old, 110 minus 40 equals 70.

So at age 40, you should have roughly 70% of your portfolio devoted to the stock market. - And do you follow that rule? - I personally do not. I do think this is a good rule of thumb and a lot of financial planners follow this rule. A lot of target date retirement funds follow this rule.

So there's a lot of people that are following this kind of thinking and formula, whether they know it or not. For me personally, I am extremely comfortable with having basically 100% of my capital in the stock market for a long period of time because it's the asset class that I know best.

And I've kind of taken this and adapted it to form my own. So I actually more consider it how many years of investment, how many years of spending do I want in bond, in cash, as opposed to it being just a raw percentage of my portfolio. So for me, when I am all the way up until 10 years from before I "retire," which is something, by the way, I plan on pretty much never doing, but if I was 10 years away from needing to draw down my portfolio, more than 10 years away, I effectively don't want anything in bonds.

I want my capital in the stock market. As I get closer to needing to draw down my portfolio and use it for my living expenses, then I would actually devote more money to the bond market and to cash, but I would do it in years of living expenses. So the rule that I've made for myself is, when I'm within 10 years of drawing down my portfolio, I want effectively one year worth of living expenses in bonds, one year worth of living expenses in cash, and gradually ramp both of those numbers up as I get closer to the drawdown period.

The reason for doing that is because the stock market is very volatile. It's unpredictable what it's gonna do in the short term, and you want to be able to use bonds and cash to pay for living expenses if you go for, if you're living through a prolonged bear market.

- That makes a lot of sense. I also don't necessarily follow this rule, but I think it's really valuable for people to realize one thing that you just said, which is a lot of target date funds are doing this. So if you look at this and say, I don't want to be allocated that highly to bonds right now, well, if your portfolio in your 401(k) is in a target date fund, you are being allocated in that way.

And the other is just to think about, over time, my portfolio should change, right? That is an important thing to consider for the reasons you just said, which I think dovetails well to the five-year rule, where we talk about when you shouldn't invest in the market and why. - Yeah, this is one that I'm a firm believer in.

The idea here of the five-year rule is that you should only put money into the stock market that you won't need to spend, that you know you won't need to spend for at least five years. The reason dovetails with what exactly I said previously. The stock market is unpredictable, especially in the short term.

I define the short term as anything less than three years. However, if you can keep your money in the S&P 500 for a period of five years, the odds of you earning a positive real return, real meaning after the effects of inflation, are actually very high. The number is about 80%.

So you have an 80% chance, if you can keep your money in the stock market for five years or longer, of earning a positive real return. That to me is an acceptable level of risk to take on, although everybody is different. But if you're gonna go for a shorter time period in that, the math is just not nearly as favorable.

- Which is why in your previous example, you wanna keep money in a safer source, like fixed income and bonds and treasuries, to cover a handful of years for that exact reason. If holding out five years will get you back to a positive return 80% of the time, and you know you're gonna need to draw down that portfolio over the next five years, well, if you have money in other places that you can use to draw down, then you can make it through whatever downturn there is.

Unfortunately, to get to 100%, I think it takes about 20 years. So the five-year rule is not without some risk. - You have to be willing to accept some level of risk in the time period that you need to, if you're gonna invest in the stock market in general.

And to your point, yeah, you don't wanna have to wait 20 years to take advantage of the power of the stock market to get to that 100% time when it is nearly guaranteed to beat inflation and deliver a positive real return for you. So five years seems like a happy medium to me.

- And a good rule of thumb that you have for kind of just thinking about the different growth rates is the 10-5-3 rule. - Yeah, if you look back historically at what the different asset classes or the major asset classes you can invest in, the 10-5-3 rule has hung true historically.

So this rule states that you can expect to earn about 10% annually from stocks, about 5% annually from bonds, and about 3% annually from cash. It is worth noting that those are pre-tax returns, or rather pre, those are nominal returns, so they do not account for the effects of inflation.

So inflation historically in the United States has been about 3%, so you can subtract those from the 10-5-3 and get your actual rate of return or your spending power rate of return. But those numbers, those 10-5-3 are decent proxies when you're considering modeling your portfolio. - Which means, by the way, that if you wanna fight 3% inflation and you're getting 10% from stocks, you can still get seven, you can get 5% from bonds, so you can still get two, and from cash, you might get nothing.

And I realize I say this in a current climate where you can earn over 5% on your cash depending on where you go, but that is not always the case. And so there's a good chart I'll link to in the show notes that you sent me or we'll put up in the video with showing these numbers in real rates, and you can see those numbers.

And the US dollar annualized return is actually negative. - Absolutely, and to your point, these are historic numbers and they're good for modeling purposes and thinking through what kind of returns you can expect. But if you go through weird periods where interest rates are abnormally low, like they were in the 2010s, or periods of high inflation like we've experienced in the early part of the 2020s, obviously these rules don't hold the water.

- Another rule that we used back when I was running a financial planning firm, we called it the 6% rule. When you think about how to invest your money, yes, don't invest it in the market if you need it in the next three to five years, but also if you have debt that's at an interest rate of 6% or higher, that's probably a better investment, right?

We talked about the stock market might earn after inflation, let's call it 7%-ish over the course of time, but over five years, you've got an 80% chance of getting a positive return. When you pay off 6% debt or 10% debt or 20% debt, that is a guaranteed return because you're going to be accumulating that interest if you don't pay it off.

And so anything over 6% for me, and for some people this number might be lower, is something that I would prioritize before investing. - Yeah, I think that's a great rule of thumb. I mean, to your point, if you can expect 5% in the longterm from bonds, and that's what he's done roughly historically, but if you have a guaranteed way to earn a 6% return by paying off debt, absolutely do that first.

- Yes, now the only argument that I'd say where that doesn't play into this case is depending on your cashflow needs, if you have 7% debt and you pay it all off, it might not be easy to get 7% debt again. And so I wouldn't pay off all debt over 6% at the expense of leaving your cashflow at zero, right?

This is how much I would pay off over investing in the market. But the one nice thing about investing, whether it's bonds or stocks, is that that money is liquid. So I think a really important rule to talk about next is the 3-6 rule, because before you do any kind of investing or even paying off debt, you need to make sure you have some money to operate from.

- Yeah, this is a rule that I've heard, geez, since I started studying personal finance over 20 years ago. The idea that I always heard was you should have in cash at least three to six months worth of living expenses in cash at all time. And this is effectively your emergency fund.

I think this is a decent starting point, but I personally believe that there are actually ways that you can improve upon this formula, because not everybody is in the same situation as other. For example, if you don't have any dependents, and if you are in an industry where it is extremely easy for you to get a different job, or if you have multiple sources of income, I don't think that you need to save much more than three months worth of living expenses.

Even that might be too much since you have so much ability to generate cash in the future, and you don't have big needs on your cash. On the flip side, if you have multiple people that are dependent on your income, and if you work in an industry that would be very hard to get a new job in, and if you are a single income household, that is a very risky position to be in, and I think it's prudent to have a much bigger emergency fund than just six months.

- And I'm gonna break down your formula, which is three months to start. If you have dependents, add three more months, and then depending on the industry, and we'll link to this and we'll put it on the screen, you might add zero to three months depending on your industry, and then zero to three months depending on how many sources of income you have.

So adding more sources of income, working in a growing non-cyclical industry, both things you could do to reduce your emergency fund needs. I left off dependents because I don't wanna be out there encouraging people, "Oh, the financially prudent thing to do "is not have children." Probably is based on how much children cost, but-- - Yeah, I can confirm that would be, I would have much more money today if I did not have kids.

- Yes, but I would be much less fulfilled, and I don't regret the decision at all. So I'm glad I have them. It just means I need to be a little bit more prudent financially. And for me, I just went through your formula, and I was like, "Okay, start with three." Have dependents?

Yes, add three. Industry? Well, I think this may apply better to a full-time job because I wouldn't necessarily say podcasting is dying or cyclical, but I would certainly say that being self-employed in an industry like this that relies on sponsors and partners and that kind of stuff would dial me up.

And then me and my wife just have this one company right now, and that company might have a couple different sorts of income, but it is for our household one. So for me, I'm already at 12 months on your calculator, and I think that even feels a little aggressive given I might wanna be more conservative and dial that up beyond 12 months, just given the fact that we're both doing this full-time with kids and there's so much variability.

- I think that makes a whole lot of sense. And yes, to your point, when you are content creators like both of us are, our incomes, my income at least, is extremely volatile from month to month. It might be predictable or relatively predictable over the course of a year, but I can see huge changes in my income on a given month.

I'm guessing it's very similar for you. - Yes, it's very dependent, and things can change quickly. So I think we try to have a lot more emergency fun. Then years ago when we both worked stable jobs and had salaries, I was working at Google. Like Google, I'd put in the add zero months.

We had no kids to add zero months. Both of us were working, and we had a tenant in our house. I was like, bam, three months. You could argue that's too much. And now here I am on the other side thinking a year might not even be enough. So I really like this rule, but I like more that you've put kind of a formula together instead of just saying three to six, which is a better rule of thumb than nothing.

But I don't know, what do you call a formula of thumb? I think I'm a big fan of the formulas of thumb. - A framework of thumb. - And what about when you think about that portfolio? So I'm assuming you set your emergency fund aside and you paid off your debt, how to allocate things.

Talk about the 5% rule. The 5% rule effectively says that no more than 5% of your portfolio should be invested into a single stock. And I would view that truly at the portfolio level, and I think portfolio, I really think it's more of like your net worth. No more than 5% of your net worth should be invested in a single stock.

So I think that's a decent starting point. It does build in some risk mitigation strategies, but this one is one that I would probably push back against because I know people that have far more than 5% of their portfolio invested in a single stock and they feel very comfortable doing so.

So this one to me is a little bit squishy and it's more about your personality than is necessarily a rule. - For me, this rule is more like 1%, right, for me. Though I would say, if you're invested entirely in the S&P, I wonder right now what percent of your net worth is in Microsoft, Apple, and NVIDIA.

Like it's gotta be a significant percentage, even though you might not think that you're concentrated. - Yeah, those three companies, Apple, Microsoft, and NVIDIA, currently, I just saw this statistic there, they make up 21% of the value of the entire index. And if you're in the NASDAQ, it's even higher.

So yeah, you are breaking this rule if you are literally investing in the S&P 500. - Yeah, virtually I'm also doing other international and emerging markets. So I don't think I'm personally breaking this rule, but I understand where it could be broken. How do you generally think about this as someone who probably advocates for stock investing more than the average person?

A lot of people talking about personal finance advocate for just index funds, and we did a whole episode on this. So I'll just defer. People can go back and listen to that episode to think about your framework for buying stocks. But how do you think about concentration and diversification in that way?

- Yep, so I personally, my personal rule of thumb that I use for my portfolio is 15%. I would not be comfortable having more than 15% of my net worth into an individual stock, but I will throw out the caveat there that the way that I personally invest is I am a long-term buy and hold investor.

So for a company to become 15% of my portfolio, it would have had to earn its way in there. I would never put 15% in from the get-go. I would probably stick to under 5% of my capital. And then if it just so happened to triple from there and become 15%, I would be personally comfortable with doing that.

So my personal, I call this my sweet sleep well at night number is 15%, but it's different for everybody. - I think the way you think about stock investing is very different than a lot of people, right? We did an episode on this investing checklist you use. The companies that would make their way past 5% for you are not fly-by-night penny stock kind of thing, right?

These are much more solid stock investments than that. Correct? - Yeah, absolutely. I mean, I am personally a huge believer that there are companies out there that single companies are less risky than the entire market, but I might be alone in that opinion. - So part of the process I used, I mentioned was I just went to chat GPT.

I was like, hey, what rules of thumb are we missing? Here's the ones we have. And a couple of them were actually ones, one of them in particular was one that I actually use. I just didn't think of it like this, which was the 10% rule, which is just keep less than 10% of your portfolio in kind of risky or alternative assets.

And this is something I've talked about with many guests in the past. It's something I particularly do, whether for you that's, you know, more non-framework driven stock investing, just this company's cool, let's not do any research and invest in it, or angel investments, or, you know, investing in other projects or wineries or whatever it is, keeping it under 10% is a rule I've long held.

- I would even throw cryptocurrencies in there or alternative assets like that. So yeah, keeping less than 10% of your net worth in those types of investments, that makes sense to me. - The other one is one that I can't speak much to, but chat GPT said it and I was like, oh, it's kind of interesting.

So I'll just share it, which is the one third rule for real estate, which is limiting your real estate investments to one third of your net worth, which is primarily for maintaining liquidity and diversification. I kind of like this rule just because I think, you know, real estate is one of those types of investments that, you know, absent doing it through REITs, liquidity is tough and you're often tying yourself up into a single property or a single unit and having more than a third of your net worth in that even seems a little risky to me if it's one building or one property.

But I like having a rule that reminds you not to over diversify and maybe limit the percentage of your portfolio in something that isn't liquid. - Yeah, and to point out there, the key word in that rule there is though, is real estate investment. I'm assuming that rule does not include your primary home.

- I would assume that's probably fair 'cause I know a lot of people who have a meaningful chunk of their net worth in their primary residence. But, you know, when I think about net worth, I also think about like the net value of the home. So if you buy a $400,000 home and you mortgage $300,000 of it, you only really have $100,000 of skin in the game.

Now, for many people that might be their entire net worth, but I just wanna remind people that if you're like, "Ooh, I have a $500,000 net worth and a $400,000 home," that doesn't mean that your home is 80% of your net worth, but I would think of it as your home minus your mortgage if you have one, that is a percentage of your net worth.

So I think about it a little bit differently, but now we're kind of going a little bit more in the weeds. - Well, I think that's right in the name. Net worth, not worth, net worth. - Yes, net home, net worth. What about the 1% rule? - So this rule relates to investment fees.

And this one I would say applies mostly historically and it needs to be modified, given what's happening with broker costs and general expenses investments more recently. But the idea here is that the investment fees that you should pay on all of your investments all put together should not exceed 1% of your portfolio annually.

If you look back in time, it was fairly common for mutual funds to have a 1% management fee. So if you had $100,000 in a mutual fund, they would take $1,000 per year in management fees. And I think that both of us think that this rule is actually a little bit high, given where prices have gone recently.

- Yeah, I don't know about you, but I personally, there are a lot of financial advisors and planners who charge a 1% fee, and that's not inclusive of the underlying expense ratios of the funds, which are often not that expensive and sometimes very, very expensive. I think paying a 1% fee is wild for your portfolio.

It's not something I advocate ever for. I don't know about how you feel about hiring an advisor at 1%. I'm okay with hiring an advisor. I would just make sure that I understood how that advisor is getting paid. I've talked to so many people that have an advisor and you press them, well, how do they get paid?

And I get a blank stare like, wow, we've never talked about that before. So it's really important that if you do have an advisor, you fully understand how you get paid. And one thing that's worth noting about this 1% rule, I would argue that a lot of people are actually breaking it inadvertently.

The one way that they can do so is if they look at the fees that they're paying on their 401(k). So many people, when it comes to contributing to their 401(k), their options for what they can invest in are very limited. And those are set by the companies that they work for.

And because of that, some of the fees on 401(k)s can break that 1% number. I've actually even seen cases where 401(k)s have funds in them that have loads. And loads is like an upfront sales charge for just putting money into a fund. Given where we are today and where costs are, there's absolutely no reason to pay that level of annual investment fee, even through a 401(k).

So check what you're paying on your 401(k). You might be surprised at what you learn. - There used to be a website, and if I find it, I will put it in the show notes, where you could go look up your 401(k) fees. Some people upload their plan docs and they get kind of summarized, and it's wild.

It can be really, really expensive. To the point that there are some 401(k)s out there that unless you're getting a match from your employer, they're just not worth contributing to. That's one. Another one is a lot of legacy 401(k)s, you might be sitting on four or five 401(k)s from all your past employers.

If your current employer has great low fee options, you can roll all those past 401(k)s into your current 401(k), or you can roll them into an IRA. And so I think if you're in a high fee 401(k), you can't move it while you're employed at that company. And so an option is to just not invest in it.

And we're gonna talk about that in a second. But if it's an old 401(k), you can get out of it. If it's an old 401(k) with low fees, my Google 401(k) had such incredibly low fees that I just left it in there for 10 years after until I finally set up a solo 401(k) recently, and then I just rolled it into that.

But it took 10 years because Google had negotiated such great deal at Vanguard that the fees were super low. - There you go. There's an example of you knew what the expense ratio you were paying with your old 401(k) and you just chose to kept it because you knew it was low.

But if you're paying a very high fee, it is completely worth it to take the time, roll it in to an IRA, or roll it into something that you control where you can control the fees. - Yeah, another place where this can be tricky is with 529s. If you're saving for college for your kids, there are a lot of states that have much better pricing than others.

And so I should do an episode on this. So this is not well-researched, but I think Nevada and Utah have pretty low fees and they're pretty popular funds, but you don't actually have to invest in the fund from your state. And so certain states have a little bit of tax advantage.

And if you live in one of those states, probably the tax advantage might be worth investing in your states for 529. But if you don't have any special advantage, you can pick the 529 in another state that has better expense ratios and fund costs and fund selection and all that.

And so for us, I think our 529s are through Wealthfront and the cost of those funds, I think the underlying fund is either in Nevada or Utah, not in California, despite that we live here. And that comes back to an important point you made that I'll just reiterate. I harped on the 1% fee as a AUM fee for advisors.

And I'm not a fan of that fee because I just think 1% is way too much. But like you said, I'm actually even less a fan of the 0% financial advisor fee because it usually ends up being two, three, 4% fee on mutual funds and high expense ratios and loads and all that kind of stuff.

So, I don't like really expensive advisors and I don't like free advisors. And somewhere in the middle, there are solutions where maybe you're just paying a fixed annual fee for financial planning and you're not paying a big AUM fee for your assets, or you're relying on software. I've talked about Wealthfront a lot.

The value software provides me doing all the rebalancing, all the tax loss harvesting, and making me not have to think about it. I'm happy to pay 0.25% for that, but I would never pay 1%. - When it comes to advisors, I'm a big fan of advisors that charge an hourly rate.

If they charge 200 or $300 per hour, not only will that make you much more efficient with the time that you spend from, but you are actually seeing the bill that they are giving you by the end. And just being able to see that bill will make you focus on what costs are we paying for this.

- And I'm a big fan of working with CFPs because if you're a certified financial planner, you usually always follow the fiduciary standard, which means that you are acting in your client's best interest. So if you're talking to advisors, that's a great question. Are you a fiduciary? And if not, I'm not sure I wanna work with you.

Okay, so that is the 1% rule. Let's talk about, I just talked about rebalancing. And so one other rule I found that I thought was worth covering is the 5/25 rule. And I don't think this is a very common rule 'cause it was one of those, talk to ChadGBT.

Hey, do you have any more? Hey, do you have any more? Hey, do you have any more? And finally it came up. But I thought it was interesting because someone must come across this. And the idea is if your portfolio deviates by more than either 5% in absolute terms or 25% in relative terms from your target allocation, you wanna rebalance.

And I think I get it, right? If you're trying to be in 60/40 and you're at 65, you might wanna rebalance. I've found, and in the analysis we did when I ran our financial planning firm, that if you just rebalance every six, 12 months, you're gonna be fine. And maybe also any major market corrections, right?

If the market drops 20, 30%, right? That might be a trigger that you'll be misallocated. But other than that, I don't know if this is one where I would follow. - Yeah, when it comes to rebalancing, I'm actually a bigger fan of doing it on a timed basis. I've heard, like you've said, every six months or 12 months.

I've actually heard that every two years or even three years is perfectly fine. The more important point is to occasionally check in on your asset allocation and make changes when you think you should. - Not just when you should 'cause it's out of track from where you want it, but because your situation has changed.

Your risk levels changed. Just like you mentioned, your emergency fund changes over time. Your risk tolerance is something that I think people should be checking in regularly on also, right? If you have no kids, you have no dependents, lots of income, stable job, you could be a little bit more risky than if you're not in that circumstance.

- Absolutely, and this is especially true when you're going from your 20s to your 30s to your 40s. It's often very common for people to get married, to buy a house, to have kids, and dependents, to get further parents to become older. So yes, check in on these rules of thumb often.

- And one other thing that's interesting, when you're checking in over time, right? You said 30s, 40s, 50s. I've always wanted a rule of thumb that helped you figure out, how am I doing? And I didn't know one existed until I saw you share the net worth rule, and, or I guess the age times income over 10 rule.

Can you talk about this one? - Yeah, this one was popularized by the wonderful book, "The Millionaire Next Door," which came out in 1995 or 1996. The idea here is to figure out what your net worth should be, given your current age and income. So the way that this rule works is you take your age, and you multiply it by your pre-tax income, and then you divide that total by 10.

This is a rough proxy for what your net worth should be. It was an example, let's say you were 50 years old, and you make $100,000 per year. Multiply those two numbers together, you get 5 million. You divide that by 10, and you get 500,000. So your net worth should be $500,000.

And then from there, you can actually compare it to what your net worth is to figure out if you are doing better than the average person, given your age and income, or worse than the average person, given your age and income. One caveat to this rule is it really falls apart for people that are under the age of 25, who haven't had a chance to actually enter the workforce and start saving for money.

So I would say this rule is most useful past the age of 30. - And I liked how there's a further part of it, which is if your net worth is double what it should be, you're a, what is it, prodigious accumulator of wealth. There are kind of terms in this triangle.

And if it's less than half, you're an under accumulator of wealth. And you could track it out and say, have I moved from one of these categories to another? - Yep, absolutely. But I like the idea that there is a target out there that is relatively easy for you to calculate, to figure out what my net worth should be.

And hopefully, given what you find, you can actually be really excited about your situation or potentially have some changes on the horizon. - Yeah, and when it comes to saving for the future, let's talk about the 15% rule. - Yeah, the idea here is that you should set aside at least 15% of your salary for retirement.

If you'll actually look back historically, most personal finance books that were written prior to the year 2000 really harped on the 10% rule, saying that you should save 10% of your income for retirement. This has been updated in recent years to 15% for a variety of reasons. One of the bigger ones is the fact that pensions and defined benefit plans have really gone the way of the wayside.

And some data that actually came in from Fidelity showed that the average retiree needs to, in retirement, generate about 55 to 80% of their pre-retirement income in order for them to maintain their lifestyle. So based on that bandwidth of actual spending, you need to save about 15% of your salary to get there.

- And they base that, I think, on saving from mid-20s to mid-60s, right? - Yes, 25 to 67 was the savings period. - So if you're starting this at 40 and you've never saved, number probably needs to be higher. If you're starting right around that time, it's a good benchmark.

Now, obviously, this is saving for retirement. There's also a rule, which is the 50/30/20 rule, that kind of might seem at the outset in conflict, but as you dig in, is not, right? - Yeah, so the idea of the 50/30/20 rule is to allocate 50% of your income to your needs, so housing, food, transportation, 30% to your wants, entertainment, vacation, luxuries, and the remaining 20% should go to savings and investment.

Now, of that 20%, we already said that roughly 15% should be set aside for your retirement. In that 15%, though, that could include an employer match. So if your employer has a generous match, not all that 15% has to come from you. And the difference between that 20% savings and that 15% for retirement, that is what you're gonna use for things like a down payment on a house or paying off debt.

- Obviously, the 50/30/20 rule is your after-tax income, right? If you make $100,000, you can't spend 50/30 and 20 of it because some percentage will go to taxes. Is the 15% rule 15% of your salary or 50% of your after-tax income? - Salary. - That's an important difference. So 15% of your pre-tax salary to retirement, 20% of your income to savings, your after-tax income to savings.

And the 15% rule is kind of loosely also based off the 80% rule, right? - Yeah, the idea of the 80% rule is that you are gonna wanna replace about 80% of your pre-retirement income during retirement. Studies generally show that retirees spend less on everything than when they are working with the only caveat being healthcare.

There's a lot of reasons for that. Often in retirement, your house is paid off, your kids are out of the home, so you're only paying for two people to eat and live as opposed to three or four people. So, and generally speaking, the older you get, the more likely you are to just stay home and not really go out.

So aiming to replace about 80% of your pre-retirement income is a good goal to shoot for. - I actually did an episode with Bill Perkins who wrote a book called "Die With Zero" that I'm sure you're familiar with. It was episode 91, and we talked a lot about this.

And he says one of the biggest problems is that people assume they're gonna spend more money in retirement 'cause they think, "Wow, when I have all this free time, "I'm gonna be traveling around the world. "I'm gonna be doing all this." And it turns out they don't, right? The data shows that it's actually less money you spend in retirement, which leads to people really over-saving.

And so I think if you're doing any of your projections and you're trying to figure out how much money you need for retirement, yes, I understand the desire to be super conservative and dial that number up so that you don't end up with nothing. But the flip side is you could be way over dialing that and missing out on spending money during years of your life where you can actually do the things you wanna do.

And so I would say, go back and listen to that episode if you are interested because it really changed my outlook on spending more than just about anything I've ever done. - I am right there with you. That might be my favorite episode of all the hacks ever. And Bill Perkins has done more to change my spending mindset than almost anybody else.

I think you and I are both cut from the same cloth where fire is extremely attractive to us, like retire early, gain financial independence. And he was the first one to push back in a very logical way and really change my thoughts about spending. - Yes, it's episode 91, allthehacks.com/91.

Don't listen to it with your children. Bill has a passion for colorful language. You also mentioned employer match. Let's talk about that rule. - Yeah, when it comes to 401(k), I've actually become convinced that the 401(k)s are not a slam dunk that they are sold to most people at.

Some 401(k)s can have really high fees. Some can have very limited choices. And with the 401(k), you are essentially locking your money up until you are 59 and a half. So there are liquidity issues with a 401(k). However, there is one thing with a 401(k) that I am an absolute believer in, and that is if you have an employer match, always, always put enough money in to take advantage of the full match.

That is literally free money, and it would be a complete waste to say no to it. - Yes, I totally agree. I've only had an employer match once in my career, and the number of people, even at Google, sophisticated, smart people that weren't taking advantage of it was just wild.

And Google finally, I learned historically, just said we're defaulting everyone to opt-in. And no matter how many programs you can do, how many info sessions, the fastest way to get people to retire or contribute to their retirement account was to just automatically default them to do it. - Nick Maggiuli also did a bunch of posts on this that we can link to in the show notes, kind of breaking down the tax value of putting money in your 401(k).

Do you remember about how much value that he found? - Yeah, that was an eye-opening thing. Nick Maggiuli is a great follow on the internet, but he actually did a study that showed what is the value, the annualized return value of the tax advantage that you get from the 401(k), and he actually calculated that it's about 0.8% annualized.

So putting your money into a tax advantage 401(k) saves you about, adds 0.8% to your return every given year. Now, that's not nothing, especially when you compound it over a longer period of time, but I was under the assumption that the tax benefits were much higher than that, which is just one more reason why you should really think about should you max out your 401(k), whereas previously I thought it was an automatic thing everyone must do.

- I actually just did the math. I took 72 and divided it by eight because we've got the rule. We've got our rule of 72 and I got nine, but it's actually 0.8. So 90 years to double your money is the value of the 401(k). I think this is also really state dependent, right?

If you live in California, the highest tax bracket between all the different state, local, federal taxes can be over 50%. I imagine if someone is at the 52, 53% marginal tax bracket in California, the advantage of putting pre-tax money in a 401(k) might be a bit higher, but I'll link to the post so people can go see what assumptions went into it.

- Yeah, absolutely. If you live in a high tax state and you have a high enough income that you are paying really the highest tax rates possible, it can make total sense to max out a 401(k) if for no other reason than you likely have plenty of money to do so.

The point there though is to look into that because it's not the slam dunk that I initially thought it was. - Next, I wanna talk about a rule that we've talked about on the show a lot, I think anyone in the FIRE community is familiar with, and that's the 4% rule.

- Yeah, this is the granddaddy of all rules of thumb. And this is the idea of the 4% rule is this is the amount of your portfolio that you can withdraw each year during retirement. So if you have a million dollar portfolio in the first year of retirement, you can safely withdraw $40,000 or 4% of that number and you can have a very high confidence rate that that money will last you throughout your retirement.

- Yes, and I think one common misconception here is that the study this was based on, the Trinity study, did not test this for people retiring at 35 years old. I believe it was like a 30 year time horizon. So if you are thinking, wow, I've saved up enough money that I can live off 4% of my savings, I can stop working at 40 and it'll cover me for the next 60 years.

That is not what the study covered, right? - Absolutely, and there are a bazillion different caveats that going into solving the, what level can I really retire at? The length that you're gonna be living off your portfolio matters. There's something called sequence of return risk, meaning that the first few years after you retire, what the market does or your rate of return really impacts that.

There's also, you have to factor in, what are interest rates during the period that you retire? For example, during the 2010s, the return on bonds was effectively zero or pretty darn close to zero, where that study really assumed that bonds had a more normalized interest rate of three to 5%.

So the 4% rule, I think, is a fantastic study point, but when you're actually making a should I retire decision, there's a bunch of other factors you need to consider. - This is a really fun topic because I think a lot of people want a simple rule of thumb for how much money do I need to save to kind of have financial freedom.

And I think financial freedom and be able to live off your savings forever are a slightly different number because you and I have found careers doing things that we enjoy doing that we have no interest in stopping doing, but they're very different from what we've done in the past.

And I would consider myself in the financial freedom. It's like, I have financial freedom because I found a job I love that I could generate income from. Yes, it might be unstable, so I need a little bit more of an emergency fund, but I think that's something that people should consider.

And the inverse of it has also been called the 25X rule, right? It's one over 0.04 turns into 25, the idea being you could look at it as, I need enough money to live off 4% or I need enough money to be 25 times my annual expenses. - Yep, exactly.

So if you need to spend 100K per year, multiply by 25, that's $2.5 million that you need before you can "retire." - Now, that doesn't factor in that 80% spending in retirement. So maybe you could argue the 4% rule works a little better because you could say, okay, how much do I need where 4% equals my retirement spending, which might for $100,000 now be $80,000.

But there's a guy who runs a blog called Early Retirement Now who has dove into safe withdrawal rates more than maybe anyone in the world. I don't know if you would agree. He has a 61-part series on his website about safe withdrawal rates. And I wanna have him on the show because I love the work he's done.

Are you familiar with all that? - Yeah, absolutely. His name is Karsten, aka Big Earn, and he has gone in-depth on this. He was actually a big part of when I was writing my book. He did a whole bunch of the data analysis for some of the charts that I made.

So I'm a big fan of his. - Yes, yeah, and by the way, when I say 61-part, I don't mean like 61 paragraphs. Each one of these parts is like a multi-thousand-word essay. So it's gonna take a lot of prep going into that interview with Karsten because we could go down hours and hours of conversation.

But we'll dive a little bit deeper into what assumptions there are. Should it really be the 3.5% rule or the 2% rule or how do you think about that? But I will save that for another episode. Last, I just wanna rapid fire through a few other rules that you found, I found, the internet found, when I created.

They aren't gonna take as much of a conversation, but let's just jump in, the 24/10 rule. - Yeah, this rule relates to when you are buying a car. So the idea here is you wanna make sure that you're making a down payment of at least 20%. You are financing it for no more than four years, and you wanna ensure that the monthly payment that you're taking on is no more than 10% of your income, hence the 24/10 rule.

So my reaction here is I'm down with 20%, though maybe not necessary. I'm definitely down with the don't go over 10% of your income for the monthly payment, that makes sense. And then the four year, I kinda get the concept, but I've never adhered to it. I've always, fortunately, I guess, always bought a vehicle in a period of time where interest rates were low, and at a low interest rate, I'll take it for as long as possible.

I'm someone who historically has not sold a car until it's been 10 plus years old, so maybe I'm a slightly different camp, but especially if you're gonna put 20% down, I'm not sure I know why the four years is as necessary, but I don't know what your experience here is.

- I think this is generally speaking a good rule for the general population, but like any of these rules, you need to know how it applies to your specific situation. Personally, I've never had a car loan. I've only, my rule is I only pay a cash for cars when I buy them, which you could say, which you could argue, given the low interest rates that you've paid, is suboptimal in its own way.

So I view this rule with more as what is your appetite and comfort level with debt personally than anything else? - Yes, and I think we had a conversation in our last episode about debt and mortgages that I'll encourage people to listen to because the decision to take on debt in some people's minds is a mathematical one, in others it's emotional, and in probably almost everyone it's a mix of the both.

But you and I had a good conversation about that last time because we kind of take different approaches here. - Yep, absolutely. Personal finance is personal. - The debt to income ratio is another one. - Yeah, the idea here is that your total debt payments should not exceed 36% of your gross income.

So when you're thinking about debts, think about all of the type of debts that you're paying interest on. That could be housing, that could be related to education, that could be related to a car that we just talked about. You wanna make sure that any payments that you're making that are related to debt instruments, they do not exceed 36% of your gross income.

- The primary reason that this rule matters is that most lenders are looking at a rule somewhere around this when they're making lending decisions. So it's often the reason that you need to sell a home to buy another home because the sum of those mortgage payments together would put you over this limit.

And so it's more of something that matters when you're about to take on larger pieces of debt, whether it's a mortgage or an auto loan or something like that. But in general, I don't monitor this regularly. I don't know if you do. I don't even know if I know what mine is.

- I don't either. I can tell you that when I was very early in my career, I used to track my numbers like a hawk. As my net worth has grown, I've become more lax with my rules because I have more wiggle room just given how much of an emergency fund I personally keep.

So I think it depends on where you are in the stages of your career. - Yeah, the final AI rule I liked was the three to 4% rule for salary. And the idea is given inflation, you should be increasing your salary three to 4% every year. I don't know if this is a rule of thumb, but I liked it.

I've had a couple of conversations in the past about salary negotiations. And I just think in general, people under advocate for themselves financially at work. And I think that every year you should be sitting down with your manager or your boss and saying, "Hey, what is the next stage of my role?

"And what do you need to see to get there?" And have them give you the blueprint so that you can come back every performance period and say, "You told me that if I were to do X, Y, and Z, "I would get to level here, and now I wanna do this." Now, those increases should hopefully be more than three to 4%.

But at a bare minimum, a cost of living adjustment or inflation adjustment of three to 4% is something you should advocate for. - Yeah, that can be a quick Google search, too. What is the inflation rate over the last year in the geography that I live in? And you should use that as an absolute basis for, "This isn't even a raise.

"This is you paying me effectively "the same amount of money you did last year." So it's not me getting richer. It's just me being able to buy the things that I need to be able to buy. - I love the idea if you work for a company that sells a product with a price to go to your manager and say, "Hey, our prices have increased 15% "in the last 12 months, so where's my salary increase?" You know, you can't argue that cost of living hasn't gone up and inflation hasn't existed 'cause we've raised our prices.

I don't know how that would go. If anyone's done that, I'm curious. But that's a tactic I would probably try to use. Last two quick ones. One I found on the internet just searching around, and I named it the 850 rule because it didn't have a name. But the idea was when a major appliance in your house breaks buy a new one if the appliance is eight years old or more or the repair costs more than half the replacement cost, the 50%.

And this is fridges, TVs, dishwashers. It says, you know, something breaks, get an estimate, find out what the replacement cost is, look at how old it is, and make a quick call on replacing it. This one is great because we've had circumstances where things have broken and we debated this and I just didn't really have a framework or a thought and I went down a long rabbit hole that rounding error is probably not that many dollars.

And so I actually like now, now I have a thing. Dishwasher breaks, I got an answer. - I love it. I wonder if there's a similar rule for cars because cars is an interesting one given how repairs can often be in thousands of dollars. - Yeah, I will look around.

If I find one, I'll share it in the future. The last one is a rule I just made up right before we started talking because I felt like none of these rules covered the cashback points world of credit cards, which is something that is near and dear to my heart.

And I'm gonna call it the 432 rule. And the idea is you should be aiming for at least 4% cash back on the area you spend the most in, 3% on everything else, and you should never accept lower than 2%. So I think that even with a one or two card strategy, you can achieve this.

And so I don't think it means you need to go build up a wallet of 20 or 30 credit cards, but no one should be earning less than 2% in cash or points equivalent because there are flat 2% cards. And if this Robin Hood card ever comes out, it'll be a flat 3% card.

And so people should never accept lower than that. But it is not hard, whether it's going simple with Bank of America premium rewards or going complicated with 15 cards. I think the average has to be above 3%. And unless you're not spending a lot and it's not worth your time, it's pretty easy to increase this number.

- Love that. The only rule there that I follow is the 1.5% rule. I thought I was doing good with a 1.5% cash back card, but following the Chris Hutchins rule, I'm clearly not up to top par. - Yeah, just to make sure people understand that I'm not talking about the rate of earning, but the rate of value.

Well, I'm gonna assume that that's a Chase Freedom Unlimited and that you also maybe have a Chase Sapphire Preferred or a Chase Sapphire Reserve. And if that's the case, you can redeem those one and a half chase points at a minimum in the Chase Portal at one and a half cents with the reserve, which means you're getting about 2.25%.

So if that's you, then I'm gonna say you cleared the lower threshold, but you could probably still do better. Glad I made it. All right, this has been fantastic. There were a couple of topics we actually bounced around talking about today before we settled on rules of thumb. So I'm gonna throw it out there to listeners for the next time.

There are three things that I think would be fun conversations. And if people have opinions, let me know, whether we talk about stock-based compensation, whether we talk about reading financial statements or sourcing investment ideas. So those are three things I'll throw out there that we talked about having an episode on.

And I'm curious what people think we should cover next. But until then, where can people stay on top of everything you're writing and doing? - I'm on all the social platforms, Twitter, LinkedIn, Instagram, YouTube. So if you type my name in, Brian Feraldi, you will find me. And my website is longtermmindset.co.

- Awesome. Brian, thanks so much for being here. - Chris, awesome to be here. Thanks for having me back.