Financial Rules of Thumb: Your Money Management Cheat Sheet

In a recent Lunch & Learn from the Office of Alumni Relations’ Personal Finance Series, John Pelletier, Director of the Center for Financial Literacy at Champlain College, shared 20 financial rules of thumb. These 20 rules can help anyone build a stronger financial foundation and become a cheat sheet to guide your everyday money management decisions.

Here’s a breakdown of these essential financial principles:

Rule #1: Spend Less Than You Earn

Only 43% of Americans reported spending less than they earn (FINRA Financial Capability Study, 2021). You can’t save money if you’re spending everything or more than you make. Small cutbacks, like saving $50 per week on discretionary expenses such as coffee, vending machine snacks, etc, can make a big difference over time. Saving $50 per week can add up to $63,000 over 15 years when invested at a 6% return.

Rule #2: Pay Yourself First

Before paying bills or other expenses, set aside 10-20% of your income for your future self. Treat this as a non-negotiable expense, like a monthly bill. This money could go toward your emergency fund, retirement accounts, home down payment, college savings, or other financial goals. This can also help relieve day-to-day financial stress, knowing you have a cushion you can rely on.

Rule #3: Have an Emergency Fund

Maintain 3-6 months of essential living expenses in an easily accessible account. This financial cushion protects you against unexpected setbacks like job loss, medical emergencies, or major repairs, allowing you to avoid high-interest debt in crises.

Rule #4: Use a Budget or Scarcity Spending Method

There are endless budgeting styles and tools out there. You have to find the one that works for your lifestyle. If you are just starting, you can try following a traditional budget like the 50/30/20 rule – 50% necessities, 30% wants, 20% savings – or use the “artificial scarcity” model, where you automate savings and investments, and live on what remains in your checking account. Interestingly, a survey of millionaires found that 45% don’t use traditional budgets but instead create artificial scarcity by automating their savings (The Millionaire Next Door).

Rule #5: Avoid Lifestyle Inflation

As your income grows, resist the urge to increase your spending proportionally. This does not mean you shouldn’t treat yourself, but to avoid overspending just because you can at that time. Keep your spending consistent and direct the additional income to savings and investments. 

Rule #6: Set Financial Goals

Establish short-term goals (emergency fund, car down payment, credit card debt payoff) and long-term goals (retirement, home purchase, college fund). Studies show that people who set specific financial goals are more successful financially and feel better about their financial situation than those who don’t plan ahead.

Rule #7: Understand Compound Interest

Compound interest is earning interest on the money you’ve saved and on the interest you earn along the way, leading to faster financial growth over time. For debt, compound interest refers to paying additional interest on previously accrued interest.

Use the “Rule of 72” to estimate how quickly your money will double: divide 72 by your expected rate of return to find the years needed to double your investment. For example, at 8% returns, your money doubles approximately every 9 years.

Rule #8: Know About Good vs. Bad Debt

Good debt is debt you take on that will help increase your income or net worth over time (education loans, mortgage, business loans). There is a sort of return on investment in these scenarios. Bad debt does not generate future income and often finances non-necessities (high-interest credit card debt, payday loans, rent-to-own). 

Rule #9: Maximize Your Credit Score

Maintaining a credit score above 700 reduces the amount of interest you have to pay on your automobile loans and leases, credit card debt, and even on your mortgage. The difference between excellent and poor credit can mean hundreds of thousands of dollars in extra interest payments over your lifetime. 

Pro Tip: Use less than 30% of your available credit to avoid dropping your credit score. For example, if you have a $6,000 credit limit on a credit card, keep charges on that card to $1,800 or less per month.

Rule #10: Pay Off Your Credit Card in FULL Each Month

Paying the “minimum” amount does not negate interest accruing on the remaining balance. High interest rates on credit cards can quickly compound into large balances, becoming harder to pay off. With rates often between 20-30%, credit card debt is among the most expensive debts to pay off. Unless it is an emergency, only use credit cards for purchases you can pay off quickly to avoid unnecessary interest charges. 

Rule #11: Avoid High-Interest Debt

Prioritize paying off high-interest debt. This is an example of where compound interest works against you. In line with the previous rule, pay off balances in full each month or as soon as possible to avoid high-interest debt.

Rule #12: Keep Housing Costs Below 30% of Income

Your rent or mortgage payment should ideally not exceed 30% of your gross monthly income. The Department of Housing and Urban Development considers those who pay more than 30% of their income on housing to be “housing-burdened.” The department recommends having at least 70% of income available for expenses beyond housing. Currently, 52% of renters and 24% of homeowners exceed this threshold, having to spend more than 30% of their income on housing (Census Bureau).

Rule #13: Automate Your Finances

Automate bill payments, savings, and investments to avoid missing deadlines and to reduce the temptation to spend. Automating your finances also helps ensure consistency in your financial plan. David Bach’s book, The Automatic Millionaire, provides excellent guidance on how to implement this strategy effectively.

Rule #14: Invest Early and Consistently

Time is your greatest investing asset. Starting early allows compound interest to work its magic—even small amounts invested regularly can grow substantially over decades. This “snowball effect” can be seen with the example that a penny that doubles every day for a month becomes over $5 million!

Rule #15: Retirement Savings = 15% of Income

Aim to save 15% of your income (including employer match) for retirement. Take advantage of matching contributions. If your employer offers a 401(k) match, contribute enough to get the full match—it’s essentially free money. 

Rule #16: Use Windfalls Wisely

When receiving a bonus, tax refund, or inheritance, allocate it strategically: pay down debt, build savings, or invest for long-term goals. Avoid the temptation to spend windfalls on unnecessary impulse purchases and lifestyle inflation.

Rule #17: Use Insurance as Protection

Protect your financial well-being with appropriate insurance coverage: health, auto, home/rental, life, disability, identity theft protection, long-term care, and umbrella policies. Not everyone needs every type of insurance, and your insurance needs may change over time. There is a balance to find, ensuring you’re adequately covered but not over-insured and creating unnecessary expense.

Rule #18: Diversify Your Investments

Don’t put all your eggs in one basket. Spread investment risk across different asset classes (stocks, bonds, real estate) to reduce overall portfolio volatility and improve long-term returns.

Rule #19: Create a Financial Plan

Having a comprehensive financial plan correlates strongly with financial success. According to a 2021 Schwab survey, “planners” are significantly more likely to have emergency funds (65% vs. 33%), be aware of investment costs (71% vs. 45%), regularly rebalance portfolios (87% vs. 63%), and avoid credit card debt (47% vs. 29%) compared to “non-planners.”

Rule #20: Track Your Net Worth

Calculate your net worth (assets minus liabilities) periodically to monitor your overall financial progress. This gives you a big-picture view of your financial health and helps you measure progress toward your goals.

Want to learn more? Watch the recording of the Financial Rules of Thumb Lunch & Learn with John Pelletier, Director of the Center for Financial Literacy at Champlain College.