The Third Philosophy: The 30% Rule

The first time I witnessed finances negatively impact a marriage, I had just graduated college and was enjoying my last summer before medical school painting a house. My best friend’s parents (one an emergency medicine physician; the other a nurse) had starkly different views on finances. The ED doc could not have been more frugal, and the nurse enjoyed spending the money that they made. This made for a difficult marriage and many awkward conversations, including one where the nursing spouse told me, “You know he just hates debt; he thinks that you have to pay off the entire house before you can even spend money to buy a lamp to put in the house.” They were doing well financially by most standards, but they still experienced an enormous amount of financial stress because they had different views on expectations and reality.

Whether you can relate to this story or not, we all know the feeling of financial stress. The question is whether this feeling of stress is caused by overspending or by being so frugal that we aren’t just trimming the fat, but have now sunk the knife deep to the marrow. Feeling financial stress is where the 30% rule will help you determine your course of action!

WAR and the 30% Rule

If you are have feelings of financial stress, then you need to apply The 30% Rule. To do this, determine your Wealth Accumulation Rate (WAR), which is the % of your AGI spent towards building wealth. Before we discuss the reason for determining this number, let’s discuss how to calculate your WAR.

Golf
Calculating your WAR is slightly more complicated than determining a golf score, but not by much.

The amount of money you are putting towards building wealth involves both the amount of money you are using to aggressively accumulate assets (savings rate towards investments) and destroying debt. If you don’t know how to determine your savings rate, you can simply use the TPP Retirement Calculator on this site. [This calculator does not include 529 investments, which technically is a way to build wealth]. Plug in your investments and you will see your savings rate on the calculator in yellow. Then determine what percentage of your Adjusted Gross Income (AGI) you are putting towards paying off debt. To calculate your WAR: Add your percentage savings rate (hopefully at least 20%) and the amount of money you are putting towards debt (hopefully at least 10%).

Wealth Accumulation Rate (WAR) = % AGI paying debt** + % AGI savings rate

For example, a 30% WAR for someone with an annual AGI of $250,000 would mean there is $75,000 each year going towards paying off debt or investing. One way this could occur is through the following example: Maxing out your 403B/401K at 18,500 (hopefully getting matched by your employer!), $18,500 into your spouses 401K, a backdoor Roth at $11000, and paying $27,000 in debt each year.

Hopefully, this person is also applying The 10% Rule towards their bonuses and promotions to help increase their WAR, which will allow them get to their goals even faster!

**Edit: Debt being paid off when calculating your WAR should be “Good debt” such as a mortgage or student loan debt.  As barelybarefoot points out in the comments below, it should probably not include your consumer debt like that tesla you are financing.

Application of The 30% Rule

If you are feeling stressed out financially, now is the time to apply The 30% Rule. After you determine whether your WAR is above or below 30%, you put yourself into one of two camps.

  1. Less than the 30% Wealth Accumulation Rate
    You are putting less than 30% of your adjusted gross income waging WAR and yet you are still feeling financial stress. This means you likely need to build something I like to call financial resilience. Life can be full of tough decisions, but if suffering from financial stress (not related to other happenings in your life) and you are at less than 30% WAR, you likely need to find your frugal gene and express it. Speaking of genes, are your other jeans all designer brands? Are you paying two brand new car payments? Did you buy the big house (or are contemplating it)? Do you live in a high cost of living area? Maybe, its time to make changes if you are feeling financial stress with a WAR of less than 30%.
  2. More than the 30% Wealth Accumulation Rate
    If, however, you are feeling the tight constraints of your budget and you are saving over 30% of your AGI, you may need to consider if your frugality is cutting too deep and needs to be reeled in. Obviously, the higher your WAR the better as long as your life is tolerating this. Let’s say your WAR is 50%. Aggressively building wealth to the extent that it negatively impacts your wellness may not be worth it. For example, my friends parents mentioned in the introduction: Their WAR was >30%, but this was clearly negatively impacting their marriage. This is simply not worth it. Becoming Financially Independent and Retiring Early (FIRE) are important, but should not be all consuming goals that prevent you from living a life well lived.

This philosophy (as with all the TPP philosophies) is a guideline for discussion and thought. You can either adjust your spending or adjust your WAR to improve your wealth and wellness.

I think a 30% WAR is a pretty reasonable goal, but I need to show some grace and recognize that not everyone’s situation is the same. Regardless, this is one tool I use to consider how I am doing in my mission to obtain both wealth and wellness.

What is your WAR? Does it impact your lifestyle negatively? Are you feeling financial stress with a WAR more than or less than 30%? What do you think?

TPP

8 thoughts on “The Third Philosophy: The 30% Rule

    • Thanks! I thought it was useful because I find in my conversations both in forums and in real life, people swing to both sides on the pendulum. I thought of this tool as a guide to a happy medium or at least a starting point for thoughtful discussion on the topic! Appreciate the comment!

  1. Interesting post TPP. I think folks might make their WAR % artificially inflated if they add paying down all debts to this. Perhaps it’s save, invest and paying down ‘good’ debt? Or debt that appreciates? Wouldn’t like them patting themselves on the back for buying that Tesla with 2.9% financing because $1200/mo going to paying down debt. Do I include extra mortgage payments in WAR? Or just payments to principal? IN worried I’m fudging my WAR%!

    • You know that is a really fair point!

      I suppose I should have specified “good debt” such as mortgage debt and student loan debt. Consumer debt certainly wasn’t the aim of calculating your WAR! Like all things, I guess it needs to be seen in the right light. I might go back and add a specification that it needs to be “good debt.”

      Thanks for stopping by!

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