The Rule of 5 is a rule that was shared by Jaspreet Singh on his YouTube channel: The Minority Mindset. I find Jaspreet’s videos very educational and entertaining at the same time. He did a video on The Rule of 5 and preaches this approach quite often. This rule simply says,
“If you can’t buy 5 of them, you can’t afford one of them.”
The Rule of 5 is designed to help you make sound decisions around what you can afford to buy so that when you are deciding to make a purchase, you have a pretty black and white approach to whether you can buy it or not.
How To Apply The Rule
Let’s say you want to buy a new car. You have your eye on the new Tesla that just came out. They are awesome and you want to buy one to show off to your friends. But wait, can you afford it? Now, on average, the new Model 3’s go for around $40,000. So, in order to buy this car, ask yourself, “Do I have $200,000 I can use to buy this car?” If the answer is no, The Rule of 5 says you should not purchase the car.
$200,000 up front can be tough, so let’s look at it differently. Let’s say you put some money down and you can finance the car for about $400 a month. Using The Rule of 5, can you afford $2000 a month on this car? If the answer is yes, then buy it, but if not, you should look to buy a different car.
How Is This Useful???
I believe The Rule of 5 is designed to help you be responsible with your money. If you can’t afford to buy 5 of something, you probably shouldn’t buy it. If you buy something that breaks this rule, then you are not responsibly putting money in other areas, like investments or savings, to ensure you are financially stable.
You may be thinking, “At this pace, I will never afford that Tesla.” That’s not true. Being responsible with your money can allow you to save, invest, become financially stable and put you in a position where you could buy that Tesla or another car of your choice in the future.
But My Friend Bought The Tesla
So, your friend ends up buying the Tesla and you know they can’t afford to buy 5 of them, so they broke the rule. You may feel like, “If they can afford the Tesla, why can’t I?” It may be true that they bought the Tesla, but can they really afford it? Most people, who find themselves stuck in the lower or middle class are stuck because they make purchases they can’t truly afford, just to look like they have lots of money. Many people will buy things that make them look rich, but at the end of the day, they really aren’t rich. They are indulging in areas where there money is more for show than it is for grow.
I know this can be tough. No, you shouldn’t buy the Tesla until it can pass The Rule of 5. In the meantime, by a nice used car to get you around…something stable that passes The Rule of 5. Then save and invest the money you are saving every month not having bought the Tesla. Do this for a few years and next thing you know, you are financially smarter, more stable, and in a better position to buy the car of your dreams.
Obviously, The Rule of 5 is not limited to buying a car. You can use it when deciding to buy a house or even when deciding to buy a new video game console. It can be applied to everything. The next time you are going to buy something, think about the price and The Rule of 5. If it passes, then buy away, if not, maybe you need to step back and reconsider. Best of luck!!!