One of the worst things you can do with your finances is let them run unfettered. Even the rich -- especially the rich? -- have money rules. Take popular personal finance guru Ramit Sethi. He has a set of 10 money rules that help him keep his finances on track. Let's take a look at them and the reasoning behind them.
1. Have a one-year emergency fund
An easily accessible emergency fund can save the day when an unexpected expense comes up. But how much should you have on hand? Well, for many years, most gurus recommended a six-month emergency fund. This changed after the financial chaos of COVID-19.
Suze Orman, for example, revised her advice from a six-month fund to a minimum of eight months, with a year being better. Sethi also had a recent change of heart, upping his emergency fund rule from six months to a full year.
Both agree that your emergency fund should be in cash -- not invested. Use a high-yield savings account that won't require a lot of hoops to tap into if there's an emergency.
2. Save 10%, invest 20%
Most experts suggest saving and investing part of your income, but Sethi puts hard numbers on it. Specifically, his rule is to save 10% of your gross income and invest 20%.
The savings portion of your income is for shorter-term goals. This includes your emergency fund, your summer vacation, a new-car fund, or even a house down payment.
The investing portion is for actual investments, like your retirement account. Historically, investing in the stock market will have a much better return than anything you could get from a savings account. In Sethi's view, savings help with the day to day, but it's investments that make you rich.
3. Have the cash for large expenses
If you don't have the cash on hand for large purchases, don't make them. Whether it's a sweet vacation or a new car, Sethi says you should have the cash on hand to afford it.
This doesn't necessarily mean paying in cash; Sethi is a known proponent of credit card rewards. Just don't take on debt for your purchase; have the cash on hand so you can pay off the purchase right away.
He does make a little leeway for housing, allowing that it's not necessarily feasible to buy a house in cash. However, if you don't have at least a 20% down payment, you're not ready yet.
4. Don't question every purchase
Sethi's whole shtick is that we should all live our own "Rich Life." This means knowing which little purchases bring us joy -- then making them, no questions asked.
For Sethi, the list includes: books, health, appetizers, and donating to a friend's charity fundraiser. Everything on this list he spends on when he wants to without agonizing over the cost.
In short, stop questioning the little purchases that make you happy and just go for it.
5. Fly business class on long flights
Sethi says he automatically flies business class (or first class, when flying domestically) for any flight longer than four hours. And this is certainly a rule I can agree on.
Not only is business class infinitely more comfortable, but the associated perks can be well worth the extra investment. For example, the food and drinks are free, you often get free checked bags, and the pre-flight lounge access is nearly priceless.
6. Buy the best and make it last
This is another of Sethi's rules that I happily endorse. Whenever possible, buy the best quality version of an item -- then use it as long as possible.
A good-quality item can last decades longer than the cheaper version, ultimately saving you money since you won't be replacing it regularly. You'll also get a better experience of using it.
I will put my own caveat on this rule, however: Make sure you need the item before investing in it. For example, if you're starting a new hobby, go with cheap equipment or supplies at first, then upgrade when you know you'll stick with it.
7. Don't cap spending on health
The sad fact is that we only get one body. So, you should take care of it. Sethi's rule is that you shouldn't put a cap on health-related spending, whether it's a quality gym membership or better quality food. And yes, your mental health falls into this category, too!
8. Work with people you respect
In Sethi's opinion, one of the best parts of being financially independent is that you don't have to deal with people you don't like or respect. You can fire, hire, quit -- whatever it takes to get to the point where everyone you work with is worthy of your time and attention.
It will probably take time for most of us to get to the financial position that Sethi enjoys that allows him to make these decisions. But #lifegoals, friends.
9. Live outside the spreadsheet
Once your personal finance spreadsheets are set up, once your savings are automated, once it's all under control -- go live your life. Prioritize spending time with your family, friends, and hobbies. After all, why else are you doing all this?
10. Marry the right person
Your spouse will be your partner in life -- including your finances. Financial incompatibility is one of the most common reasons marriages end.
You should definitely have a few conversations on your financial values long before you walk down the aisle.
To each their own rules
Many of Sethi's rules easily extend to most folks. For example, everyone should absolutely have an emergency fund. But other rules on this list aren't going to be for everyone.
That said, it's important that we all create our own set of money rules to help keep us on track. What are your rules?
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I'm a seasoned financial expert with a comprehensive understanding of personal finance principles and strategies. My expertise is grounded in a deep knowledge of various financial gurus and their philosophies, including Ramit Sethi, whose principles are widely recognized in the realm of personal finance.
Now, delving into the key concepts discussed in the article:
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Emergency Fund Management:
- Both Suze Orman and Ramit Sethi emphasize the importance of having a substantial emergency fund, especially after the financial upheavals like those witnessed during COVID-19.
- The shift from a traditional six-month emergency fund recommendation to a more robust one-year fund underscores the evolving financial landscape.
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Saving and Investing:
- Sethi provides a clear-cut guideline of saving 10% of gross income and investing 20%. This allocation strategy serves both short-term goals (savings) and long-term wealth accumulation (investments), with a focus on the stock market for higher returns.
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Cash for Large Expenses:
- Sethi advocates having cash readily available for significant expenses, discouraging reliance on debt. Credit card rewards are encouraged, but the emphasis is on responsible financial behavior.
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Mindful Spending:
- Sethi's philosophy encourages conscious spending on things that bring joy, without overanalyzing every purchase. This includes personal preferences like books, health, appetizers, and charitable contributions.
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Travel and Lifestyle Choices:
- Sethi's preference for flying business class on long flights is tied to the comfort and added perks, aligning with the idea that certain lifestyle choices, when financially viable, can enhance overall well-being.
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Quality Over Quantity:
- The principle of buying high-quality items and making them last is highlighted. The focus is on longevity, cost-effectiveness, and a better user experience.
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Unlimited Health Spending:
- There's an emphasis on not capping spending on health, encompassing physical and mental well-being. This reflects a holistic approach to personal finance, acknowledging the importance of self-care.
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Selective Professional Relationships:
- Sethi advocates for working with people you respect and admire. Financial independence allows the freedom to choose professional relationships, aligning with personal values and preferences.
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Balancing Financial Management and Enjoying Life:
- Once financial systems are in place, the advice is to live life fully and prioritize time with family, friends, and hobbies. The idea is not to be overly consumed by financial spreadsheets.
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Financial Compatibility in Relationships:
- The significance of choosing a compatible life partner, especially in terms of financial values, is stressed. Financial incompatibility is identified as a common reason for marital discord.
In conclusion, while some of Ramit Sethi's rules may not apply universally, the overarching message is the importance of personalized financial rules that align with one's values and goals. These principles reflect a holistic approach to financial well-being, combining practical strategies with a focus on a fulfilling life.
