Rules, rules, rules. They’re everywhere. Whether you want to save money or lose weight, there are rules to doing it.
Last week I showed you how to budget without driving yourself crazy. Even though I simplified budgeting, there were still rules in there.
It’s a great starting point. But what happens when the rules become too much?
Think about any kind of self-help book or article you’ve ever read. Most of them give you a ton of rules that you’ll never remember.
Even Dave Ramsey gives you rules. The Total Money Makeover has a set list of rules to help you reach financial independence.
As people, we generally don’t like being told what to do. In fact, a study shows that we feel more powerful and in control when we break rules.
Instead of trying to get rich by following a ton of rules from various books and websites, simplify it.
I’m going to show you how simple rules can change the game. You’ll waste less time, get more creative, and start to get rich faster.
What Are Simple Rules?
Simple rules are clear-cut guidelines for defined activities or situations. That’s according to Simple Rules by Donald Sull and Kathleen Eisenhardt.
The idea is that simple rules will help you make good decisions when things start to get crazy. For example, saving for retirement can be a complex process. You have to know things like:
- which type of account to set up
- where to set it up
- how much to deposit
- what investments to choose
- what type of allocation you should have
- how to withdraw or re-balance
See? It can get crazy.
Simple rules help you cut down on the things you need to consider in certain situations. You do this by focusing only on the crucial elements.
This helps you avoid stewing over details that don’t matter that much. It will help you make good decisions in a hurry.
Let’s use a more extreme example to highlight this point.
Say you’re driving down a country road at night. There are no lights. You’re in the middle of nowhere.
You know the road, so you decide to pick up the speed a little. No cops are ever in the area, so you figure you’ll be fine.
Then, a deer jumps out in front of your car. You slam on the breaks and swerve out of the way.
You realize you can’t stop because it’s a dirt and gravel road. You continue to slide until you crash into a tree.
Your car is smoking from the engine. What do you do?
This is a pretty complex situation (and yeah, it’s pretty extreme). Remember, when following simple rules you’re going to focus on the crucial elements only.
First you’ll want to make sure you’re not injured.
Assuming you can move, the next thing to do is get out of the smoking car.
Finally, you’ll want to call for help. In this story we’ll assume you have a phone with service. Let’s not take this too far.
So the simple rules in this extreme, complex situation?
- Check to make sure you’re not injured
- Get out of the car
- Call for help
You might be reading this thinking of all other sorts of things that you would do in this situation, right?
That’s my point – all those other things you’re thinking of are not simple rules. You’re adding steps to the scenario to make it more complex.
I know this example was extreme, but it’s to drive home the point: simple rules focus only on the crucial elements to help you make good decisions as fast as possible.
Why Use Simple Rules?
Two Major Advantages
There are two major advantages to creating and using simple rules:
- They’re short
- They’re not too descriptive
By making a list of rules short, you’re more likely to remember them. You’re also more likely to follow through on them.
A great example of this is from best-selling author Michael Pollan. In his book Food Rules, he lays out 3 diet “secrets”:
- Eat food
- Not too much
- Mostly plants
These are simple rules. The list is short and easy to remember. Thus they’re easier to follow.
You may be asking yourself what he means by “eat food, not too much, and mostly plants.” That leads to my next point.
Simple rules are intentionally not too descriptive. This leaves it open to interpretation and allows you to be more creative.
Michael Pollan is telling us to eat mostly whole foods instead of processed crap. We shouldn’t stuff our faces (not too much). And finally, don’t overdo it on the meat (mostly plants).
But he’s not telling us exactly what foods we should eat, when to eat them, and how much meat is too much. He’s leaving that up to us to decide.
In doing this, we become more creative. Yet we stay focused on the crucial elements – the simple rules.
Making sense? Now let’s try a financial example.
Using the example from earlier, let’s say I have 3 simple rules for saving for retirement:
- Pay yourself first
- Mix up your investments
- Check in often
That’s pretty vague, right? It’s meant to be. I’m focusing on the crucial elements.
You have to pay yourself first, if you remember from my last article. You want to make sure you diversify so you’re not bound to the performance of one stock. And you want to check in on how you’re doing.
These are the crucial elements. From there, you can get as creative as you want.
Paying yourself first can mean a lot of things. I’m not telling you how to do it, when to do it, or how much to set aside. That’s up to you.
I’m not telling you what portfolio allocation you should have, that’s up to you.
I’m also not telling you what often means. That is up to you.
Odds are you’ll do some research to figure those things out. My hope is that your final decisions will be yours. Not mine. What may work for me doesn’t necessarily work for you.
Bottom line – follow simple rules when you’re in a bind and need to make a quick decision. Soon it’ll become normal for you.
Promoting Collective Behavior
I’m far from a history buff, but I want to use an example from history to share this thought.
Think back to the American Revolutionary War. There were battles all over the place. It took years. It took the lives of about 25,000 Americans. Yet we persevered.
We couldn’t have done this without some type of order. We had to organize, work together, and follow some sort of basic guideline. Even if much of it was off the cuff and by accident.
In order for us to be effective, we have to coordinate with one another. Rules are necessary to lead us toward a shared goal.
Complex, detailed rules won’t work – we’ll forget them and give up. This is yet another reason simple rules can help us reach goals together.
The coolest part about this is we’re always working together on a shared goal. Whether it’s you and your family, or you connecting with a community, we tend to have some shared goals.
Working together and connecting with others on shared rules can help you get there.
You can meet all these goals if you set up simple rules that become norms. Norms that are so obvious and basic that you’ll stick to them without even thinking.
Go back to my earlier example on saving for retirement. My simple rules were 1) pay yourself first, 2) mix up your investments, and 3) check in often.
This is something that can:
- help you reach your goal of saving for retirement, and
- become automatic because it’s so basic and obvious
The Different Types of Simple Rules
There are 6 kinds of simple rules.
The first 3 are the basic foundation of simple rules. They help you make better decisions.
The next 3 are types of rules that help you improve. Once you’ve mastered the basic types of rules, these will help you make even better decisions.
Let’s break it down.
#1 – Boundary rules
Boundary rules come into play when you have to make a yes-or-no decision. I’ll use the example from the book:
If you’re a burglar, how do you decide if you should break into a house? You will most likely want to go after a house when nobody is home. But how do you know if nobody is home?
According to the authors, most burglars don’t use a complex plan to come up with their crimes. In fact, most of them rely on one simple rule: don’t break into a house if there’s a car parked outside.
Pretty obvious right? That’s the point.
Remember, simple rules should be basic, obvious, and become second nature.
Think about making a big purchase as a frugal-minded person. You can live from one simple boundary rule if you wanted: do I have the cash to pay for this now?
If yes, then buy it. If no, then don’t.
It’s simple, obvious, and basic. Yes, there are a hundred other factors that go into this decision.
But once you do that, you’re no longer living by simple rules. You’re complicating things. Oftentimes for no reason.
#2 – Prioritizing rules
Prioritizing rules are useful if you have to organize many options.
As a saver, you have tons of different options on where and how to save your money. But you only have a limited amount of money to save. How do you rank the options?
You could make one simple rule to save by: split your personal and retirement savings equally.
Again, simple and to the point. Don’t waste time digging into intricate details and formulas, just split your money 50/50.
#3 – Stopping rules
This one is pretty obvious, but stopping rules tells you when to stop doing something.
Let’s say you’re spending too much money. Your simple stopping rule might be: stop spending when your account reaching $400.
You could make this much more complicated, but you don’t have to. Simplicity is key. Know when stop by making a simple stopping rule.
Improving Your Performance
#4 – How-to rules
How-to rules give you some direction on how to do something, but aren’t too descriptive. They’re vague enough to leave room for lots of creativity.
If you recall, I made up 3 “how-to” rules for saving for retirement earlier. They give some direction, but they’re simple enough to allow you to get creative with them.
#5 – Coordination Rules
Coordination rules help you stay on track. They’re often used in social interactions to help you know what to do in specific situations. For instance, you might look at Entrepreneur’s 10 Laws of Sales Success to start.
I wouldn’t consider these simple rules, being that there are 10 of them and some are more complex. But we could pick one of them and make it a simple, coordination rule.
Law #2 states “Sell with questions, not answers.” This is a perfect example of a simple coordination rule.
As a new salesperson, you could live off this one rule. It helps you stay on track when you’re in situations and not knowing what to do. Just ask questions.
Here’s another example. In personal finance, assume that one of your favorite stocks just plummeted in value. You don’t know what to do.
Before you even start investing, set up a simple, coordination rule for yourself. Maybe it’s something like: always step away for a day before making a decision.
If you invested using this rule, you wouldn’t subject yourself to news and market panic. Many times stocks plummet for a day, then climb back.
In this case, you may have stopped yourself from making a rash, impulsive decision to sell the stock. This simple rule may instead force you to step away and re-evaluate the situation the next day.
This keeps you coordinated and on track with your investment strategy. Hell, the stock may have dropped in value due to a false story in the news. You never know.
#6 – Timing Rules
Timing rules help you decide when to do something. The easiest example is when you should go to bed.
According to the authors, research has found you can strip this concept down to four simple rules:
- Get up at the same time every day
- Don’t go to bed until you’re tired
- Don’t stay in bed if you’re not sleeping
- Reduce the time spent in bed
By following these simple, basic rules, you can improve your sleeping habits.
But what about money?
To give an example, here are 3 simple timing rules for saving money:
- Start saving as early as you can
- Save on a consistent schedule
- Move 100% of your bonus and tax refund into savings
All are simple, obvious, and open to interpretation and creativity. They’re also time-based to help you decide when to save money.
How to Create Simple Rules
You can definitely follow the simple rules that others have laid out for you, if that’s what you prefer. The risk in that, though, is you aren’t crafting rules that are good for you.
Simple rules that work for someone else may be ineffective for you.
If you get the concept of simple rules at this point, and don’t want to create your own, skip to the conclusion. But if you’re ready to learn how to create your own simple rules, read on.
Simple Rules Can’t Just Come From Anywhere
First, you should know that you can’t just pull simple rules out of a hat. If you want to make sure your rules are right for you, you should base them on a deep, reliable source of knowledge.
I’m talking about your own experiences.
Every day we go through life learning things. Whether we know it or not, we are learning how to get by in life.
So why not take past experiences and failures and turn them into simple rules to help us later?
Tina Fey did this. The authors talk about how Tina Fey wrote down 9 simple rules for managing a comedy show. She did this based on her experience working with Lorne Michaels.
If you don’t have enough experiences to build simple rules from, that’s okay too. You can draw on experiences from others.
Maybe you have a relative that experienced financial hardship. You can turn their experiences into rules for yourself. That’s what I did.
Companies do this too. My wife subscribes to Ipsy. Each month, they deliver a bag full of makeup, usually sample size, for her to try.
Ipsy takes queues from the failures of department and makeup stores. These stores sell full-size versions of their products for much more money.
This doesn’t allow the consumer to try the product to see if they even like it. It’s a big investment. So Ipsy uses these experiences as a reference and creates their own simple rules that lead to profits.
You can also base your simple rules off of research. You’re then using proven facts to form your simple rules.
For example, the average credit card interest rate is over 15%. One of your simple rules of personal finance could then be: don’t ever carry a balance.
3 Steps to Create Simple Rules
#1 – Figure out the critical action
Knowing the critical action will help drive you toward your goal.
For example, you might wish to increase your savings rate. The critical action could be to cut out the one major cost that’s keeping you from saving more money.
#2 – Identify the bottleneck
The bottleneck is the problem that keeps you from succeeding. Using the example above, the bottleneck might be your car payment.
Maybe you owe too much on the vehicle and your payment is $500 a month. If you had that $500 back, you’d be able to increase your savings rate.
#3 – Form simple rules based on discoveries from #1 and #2
You now know you need to increase your savings rate. You’ve also identified the problem as your car payment. Now you’re ready to build rules off of these findings.
One solution could be to pay off your car. To do this faster, you might cut out spending on anything non-essential for 6 months.
Your simple rules would now be:
- Don’t buy anything non-essential
- Put every extra dollar toward the car loan
Simple Rules Won’t Last Forever
After you’ve created and stuck to your simple rules for a while, it becomes easy to follow them. This is good. But it won’t last. At least not forever.
Although the rules you create may still be working for you, you shouldn’t stop trying to improve on them.
Also, you may have created the rules when you were at a different point in life. Perhaps you were making less money. Or maybe the research you used to create your rules no longer applies.
Don’t stop trying to improve. Get comfortable, but not too comfortable.
Look for creative ways to improve your simple rules so you can reach your goals quicker and easier. With money, that’s always a good thing.
You don’t have to be perfect at creating your simple rules. You’ll get better at it over time. Just give it a shot and see how it goes.
The cool part is that they’re meant to be short and basic. Because of this, you’re going to interpret them how you need to so they make sense for you.
So to recap, rules help you support structure and meet your goals. But most of what you read are complex, lengthy rules that you’ll never remember and often avoid.
Instead, create a set of simple rules for yourself for different situations. Specifically for money and personal finance. Make them short and sweet, basic, and open enough that you can be creative with them.
Just remember that your simple rules won’t last forever. You want to make sure you get comfortable, but don’t lose sight of the rule entirely.
You made it a rule for a reason. Check in from time to time to see how you can improve it.
When it comes to money, you should be creating simple rules. Having a set of these “simple rules” for things like spending and saving can help you succeed. And you’ll do it in less time with less effort.
You’ve just invested some time reading this article. Thanks for that. Now, take an extra 5 minutes to come up with some simple rules for one aspect of your financial life.
Maybe its saving, maybe it’s spending. Just try something before you leave this article. You’ll thank yourself later.
Did you enjoy this? Don’t forget to check out Simple Rules by Donald Sull and Kathleen Eisenhardt. It was the inspiration and foundation for this post.