Applying the 20% Rule – Part II ( Your Possessions)

In my precursor post called Applying the 20% Rule – Part I ( Your House), I defined the 20% Rule and the 5% Rule as follows:

You should have no more than 20% of your Net Worth ‘invested’ in your house at any one time; you should also have no more than 5% of your Net Worth invested in other non-income-producing possessions (e.g. car/s, furniture, ‘stuff’). Why?

This ‘forces’ you to keep the bulk of your Net Worth in investments i.e. real assets (stuff that puts money into your pocket … not stuff that drains your finances)!

As a reminder, I represented this as a simple formula:

20% (max.) for your house + 5% (max.) for all the other stuff that you own = 75% (min.) of your Net Worth always in Investments

I also pointed out in that article how the Current Market Value of Your House will usually go up over time (current market conditions aside) but, the Current Market Value of Your Possessions will usually go down over time (collectibles aside!).

Whereas houses generally appreciate … possessions generally depreciate!

Now, as much as I hate to point this out (because the ‘frugal blogging community’ will probably fry me!) you can actually use this interesting financial anomaly to buy more stuff

… and, according to the $7million7year ‘philosophy’ the process of making money and getting rich should sometimes mean ‘delayed gratification’ but should never have to mean ‘no gratification’!

That means, that when starting out you may have to buy what you need and maybe even buy a house and generally screw yourself up financially (that’s where the ‘frugal blogging community’ comes in handy, because they will show you how to minimize – perhaps eliminate this risk – even better than my basic Making Money 101 Principles can help you).

If you do, by following my Making Money 101 steps and reading (and following) as many of these posts as possible, you will get yourself on the right track and find that:

 1. Your House fits the 20% Rule,

2. Your Meager Possessions fit the 5% Rule,

3. And, you are sensibly Investing the rest!

What now … well, pat yourself on the back and wait … until:

i) You have saved up enough cash to buy whatever it is that you are salivating over – repeat after me: we will never borrow money to by depreciating ‘stuff’ again – and,

ii) You have revalued your stuff (eBay and Craig’s List are two excellent sources of ‘current market valuations’ for all sorts of ‘stuff’) and found that they have lost so much value since you bought them that they now total less than 5% of your Current Net Worth, and

iii) The (hopefully, now increased) equity in your House still fits into the 20% Rule – and, you have applied everything in Applying The 20% Rule – Part I (Your House) if it doesn’t, and

iv) If you do buy the ‘New Stuff’, the total Current Market Value of your Possessions still fits into 5% of your current (hopefully, by now increased) Net Worth.

…. if you can check all of the above ‘boxes’ … go ahead and buy it, guilt free – you deserve it!

Now, the astute investors out there will have realized that if you increase your Investment Net Worth (i.e. the minimum of 75% of your Notional Net Worth that you keep in income-producing INVESTMENTS) – as you should, by an average of 8% compound a year or better – you will be able to increase the other 25% that is in your home equity and possessions to match!

In other words, you will (if you so choose) be able to match an increase in lifestyle arising from a better financial position …. life doesn’t get any better than that, does it?

Be Sociable, Share!

15 thoughts on “Applying the 20% Rule – Part II ( Your Possessions)

  1. So is stuff for your house part of the house or part of the stuff? Like we had to buy ceiling fans. And curtains and sink stuff, those are obviously for the house because they are attached.

    One exception I would have to the stuff rule is the tools you need to make money. I invest out of my home, so we have some very nice high end computer systems, also I have a SUV that I use almost totally for business related things. Also we have a large amount of tools for when we go rehab houses, so that it can be done faster and more efficiently. I realize that this is different than most people, because they don’t have a business, but I don’t classify this stuff was part of the “stuff”.

    But your point of never borrowing to buy stuff that depreciates is a great word of wisdom. The only thing that most people will still have to borrow for is their car.

    Jason Dragon

  2. @ Jason – Maybe their FIRST car … they should then drive it into the ground, until they can pay CASH for their second.

    Anything that helps you increase your income can also be an asset, therefore, CAN be in the 75%. Just make sure that you are not fooling yourself; for example, I happily lease cars through my business, but I still usually (not always) buy used and often keep even after the lease runs out.

  3. Pingback: People will usually trade equity for peace of mind « How to Make 7 Million in 7 Years™

  4. Pingback: How much house can you afford? « How to Make 7 Million in 7 Years™

  5. Pingback: Where do all these rules come from? « How to Make 7 Million in 7 Years™

  6. Pingback: Car or curse? 7 case studies … « How to Make 7 Million in 7 Years™

  7. Pingback: Spending your Net Worth « How to Make 7 Million in 7 Years™

  8. What do you think should be included in possessions?


    In a way, this makes sense because even (lower cost) things like clothes, cheap furniture, CDs, DVDs are most definitely not generating any income!

    On the other hand, I have an approximate net worth of £26,000. Of this, £3000 is “Stuff”. This obviously does not meet the 5% criteria…

    I have included all my major possessions (cheap car @ £500) and things like 500 CDs, using a value of £3 per CD = £1500 (i.e. 2nd hand resale value), Hifi @ £500 (resale value), cinema system @ £500 (resale value), computer @ £500 resale value.

    I have some books and some cheap IKEA furniture, as well as some cheap clothes, but where does one draw the line?

    Do you think resale value is the correct way to evaluate these things?

    Many thanks for your thoughts.


    PS – I only discovered your blog yesterday and the April 1st post almost had me fooled!

  9. @ James – After reading yesterday’s tongue0in-cheek tripe, I’m surprised that you came back for more punishent!? 😛

    Great question! The simple answer is that anything that you can buy from your daily or weekly budget is probably a ‘consumable’, whereas, anything that you need to save up for (or finance) is probably a possession.

    But, you are right: building up a CD collection over time creates a ‘possession’ again … hmmmm, I think I’ll have to sleep on this one 🙂

  10. Thanks Adrian.

    That definition makes sense.

    I suppose a large enough vinyl / CD / whatever collection would count since it would have some value and could be sizeable.

    I’ll continue to use a conservative estimate in the value of it though.

  11. Pingback: Avoiding a one-way ticket to misery … « How to Make 7 Million in 7 Years™

  12. Pingback: real rich, real simple « How to Make 7 Million in 7 Years™

  13. Pingback: Insure your future? « How to Make 7 Million in 7 Years™

  14. Pingback: The Real Value of Money?- 7million7years

  15. Pingback: real rich, real simple, redux- 7million7years

Leave a Reply