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Personal Finance Rules

Here are some helpful rules and guidelines when it comes to personal finances. I’ve used these over the years to plan out my financial goals and hope they’ll be of some help to you as well.

In a previous post I talked about good rules for medical professionals. In this post, I’ll discuss broader personal finance rules.

And here are my 14 financial sins which medical professionals should avoid.

1. x836 Compounding Rule

Multiply any recurring monthly expense by 836, that’s how much extra money you could have in your savings after 30 years if you saved and invested that money instead.

Saving that $500/month for car expenses would come out to an extra $468,000 in your savings account.

30 years goes by fast but it also has a powerful compounding power.

2. x300 Investing Rule

Figure out your monthly household expense and multiply it by 300. This is how much money you would need to have invested in relatively low-risk investments in order to earn that money passively every year.

If I spend $5,000 per month then I would need $1,500,000 saved and invested in order to earn that passive income.

3. 80/20 Investment Rule

This is a simple rule which summarizes your investment portfolio. You basically keep 80% of your investments in stock equivalents and 20% in bond equivalents.

Our asset allocation should be based on our risk tolerance but it’s hard to go wrong with an 80/20 weighted portfolio. Going 100/0 won’t make a significant different and going 60/40 won’t hurt you all that much either.

4. $100/hr labor cost

When a layperson with a high school education starts a real estate business, they might not take into account the financial value of their time. They will ignore the time spent on renovating the property, communicating with tenants, or hunting for new rental income properties to purchase.

A medical professional who spends 10 hours a month managing their property should account for this expense in the P&L at $100/hour.

A rental income portfolio which nets you $1,500/month and requires 15 hours of your time a month is a wash in terms of profits. 

5. 4% Passive Income Rule

If you invest in broad index funds, with a mix of stocks and bonds, then you can expect to have an annual 4% income from your portfolio.

The conservative version of the 4%-rule is the 3.5 or 3%-rule. It’s not meant to be a law but a guideline.

If you have a $500,000 portfolio then you’ll have at least a $15,000 annual take-home income – or $1,250/month. Add zeros as needed.

6. 2,000 Full-time Rule

If you need to quickly calculate what your gross annual income would be based on your hourly income then multiply that number by 2,000 (hours).

Assuming you work full-time, $100/hour would be equivalent to an annual salary of $200,000.

7. 50% cost of living

You can move to a different state or a different city within the US and enjoy a 50% reduction in your household overhead.

Those who grew up in major cities, especially coastal cities on either end of the US, are at highest risk of excess spending.

Some states don’t have state income taxes. Other cities offer you a higher pay while you enjoy a lower commute cost.

8. 50% Investment Rule

If you’re going to invest in the securities market, expect to see your net worth drop by 50%, at least 2x in during your lifetime.

If you have a net worth of $400k then expect to see it drop down to $200,000. If you have a net worth of $1.6M then expect to see it hover at around $800,000 for a while.

9. 2/3 of household expenses

2/3 of your spending is taken up by housing, food, and transportation.

For medical professionals this number is likely far higher. In fact, the higher your household income, the more you’re likely to spend on these 3 budget items.

10. 40% Per Diem Rule

If you decide to go per diem, expect your household expenses to go down by nearly 40%. We spend a ton of money on holding together a full-time work schedule.

When you go per diem and no longer work full-time, you’ll save a lot of money – including taxes – and many physicians can cut as much as 50% of their overhead by going per diem.

Even if you work full-time, as a per diem you have the ability to work when you want, where you want.

11. 3% Inflation Rule

This is simple, but assume that the average annual inflation is 3%.

That’s why most jobs come with a built-in 3% annual salary increase. It’s called a cost-of-living adjustment.

It also means that the money you have sitting in your checking account would be worth 3% every single year.

12. 10-Year Retirement Rule

Any physician can retire within 10 years if they start getting everything in place, starting now. Our highly income pretty much guarantees this.

That’s enough time to pay off debt, put together an emergency fund, and start investing. The money will grow to enough in the future to secure your retirement.

10 years is also enough time to adjust your lifestyle down to spend less and live more efficiently. We have enough income as physicians to allow for all this to happen in less than 10 years.

13. 12-month Emergency Fund Rule

Though 6-months should be more than enough, having around 12 months of your minimum household expenses saved in an emergency fund will offer you a ton of security.

Early on in your career, 6 months should suffice. As you get rid of debt and have a lower overhead, aim for 12 months.

Imagine having $80k in a savings account which you’ll never touch except for financial emergencies. You’ll feel safe and secure and will make better decisions because of this.

14. 20% income loss

Households who don’t budget let 20-25% of their income slip through their hands every year.

The numbers are higher for those with higher incomes, such as physicians.

For a family medicine doctor who takes home $180,000/year, that’s a loss of $36,000/year. 

15. 6% Ownership Rule

Owning stuff isn’t free. In general, whatever you own has ownership costs. On average, it will cost you 6% per year to own your stuff.

If you own a $100k car then you’ll have $6k/year of expenses on it. If you own a $1M home, you’ll have $60k of annual expenses.

Try this with different things you own and see how close it’ll come.

16. 72 Rule

If you want to figure out how long it will take for you to double your investment based on a particular investment return rate, then you divide 72 by the interest rate.

I invest conservatively, so I expect a 5% annual return. If I invest $100k, it should double in 14 years. If I invested $500k, it, too, would double in 14 years.

2 replies on “Personal Finance Rules”

What a great list of rules. A few I knew of. A lot are new to me.

I find it interesting the suggestion that once you pay off debt you increase your emergency fund from 6 mo to 12 mo. I would think when you don’t have fixed debt expenses to pay each month your need for an emergency fund would be lower not higher.

I do agree there is a financial peace of mind when you are sitting on a large amount of money in cash equivalents but it also has to be balanced by the negative effect of cash drag

Good point. If you’re financially stable and feel secure in your career/job then you wouldn’t need to increase your emergency fund holdings. I often make the assumption that most physicians don’t want to practice medicine forever and want to eventually change careers. Though that obviously doesn’t apply to all docs.

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