There are no rules in finance—only structures

"Rules" simply add structure. Pick carefully.
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written by oz chen

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image illustrating woman walking on tightrope represented by a broken ruler

The personal finance community went crazy when Dave Ramsey suggested a safe withdrawal rate of 8%. This violates the typical 4% rule that the early retirement community has long held as the standard.

In personal finance, you’re going to hear a lot of “rules.”

  • The 4% rule
  • The 50/30/20 rule
  • Debt to income ratio of no more than 43%

So on and so forth.

If we blindly follow rules without anchoring to the reality of our own finances and goals, then we could be led astray.

Let’s start with a classic example: “Save at least 10% of your income.”

Sounds perfectly reasonable. That’s better than zero.
But what if this person is interested in retiring early?
Then saving only 10% will not let most people to become work optional before 65.

This happens because we confuse “rules of thumb” with actual rules.

By definition, a rule of thumb is “an approximate method for doing something, based on practical experience rather than theory.”

Let’s say I give you an investing tip that works for me in the 2010s, based on my personal experience.

That may not apply to you in the wildly different economic environment of the 2020s.

Here’s a filter you can use every time you hear a finance rule:

Rules may add structure to an otherwise unstructured thing.

The person who needs to hear “save 10% of your paycheck” probably lacks structure in their finances.

Rules are sexy because they provide a feeling of certainty.
“If I just follow this rule, then I’ll be set.”
But rules, by nature, must be broadly applicable.

And if they’re broadly applicable, then rules are designed for the average person and the lowest common denominator.

(You’re definitely not an average person if you’re reading my blog.)

The American household savings rate averaged 8.5% between 1959-2003 (source).
Yes, Americans should save at least 10% of their income because on average most don’t.
So is saving 10% a helpful “rule” to help HENRYs build wealth investing? Probably not.

Success doesn’t come from meeting the lowest common denominator. Rather, it requires above-average performance.


Consider that most “rules” are just starting structures that may be helpful for 1 leg of a journey.

1 rule can act like an initial onramp to help you get started.
But in the physical world, structures degrade.
They’ll eventually require repair or replacement.

Just keep in mind that same structure may not be relevant as you progress through Maslow’s hierarchy of financial needs.


So…what rules do I follow?

I abide by mental models more so than hard rules. Here are 3:

#1 Margin of safety:
I c
reate more than I think is needed in terms of a margin of safety. If I think it takes 6 months to find a new job, then I’ll save for 1 year of expenses. I’ll always add a buffer, because I don’t know.

#2 Diversification:
Diversification supports the idea of margin of safety. If I have all my wealth in 1 stock, then I have less margin of safety if that stock drops in value. That’s why I love index funds: holding 1 index fund like VTI is like to holding thousands of stocks. But I also diversify across asset classes. Outside of stocks, I hold cash, bonds, real estate, private loans, and crypto.

#3 Have a vision and goal to shoot for.

Ultimately the goal is to create a fulfilling life. My money goals are tied to questions like… What kind of lifestyle do I want? What do I want to live? Am I willing to sacrifice short term pleasure for long-term stability or gain?

_ _ _

Tl;dr

  • Rules are just suggested structures when provide some sort of clarity or direction
  • Rules are largely designed for the average person and lowest common denominator
  • Evaluate rules based on whether they make sense for your own goals and journey

And yes, even if I write about another “rule,” take that with a grain of salt, and just think of it as a suggested structure.

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