In PHP, variable names must start with a letter or underscore. The rest of the name can include letters, digits, or underscores. For example, $var1 and $_var2 are valid variable names. However, $3var is invalid because it starts with a digit. This rule helps PHP understand variable names correctly and avoid errors. When checking variable names, first the initial character is verified, then the rest are checked for allowed characters. If any character is invalid, PHP will raise an error. Remember, no special characters like hyphens or spaces are allowed in variable names.