I was recently speaking with someone about the personal financial challenges that I have observed over time. Toward the end of our conversation the person I was speaking with stated that, “It would likely be helpful if you could distill key personal finance “rules” into a grand list that is easy to follow. Sort of like a set of personal finance commandments.”
Thinking through all of various personal finance “rules” I know resulted in the following list of “Ten Commandments,” which are offered in no particular order:
- The house you live in is a home, it is not a source of equity to “unlock” or an ATM-like repository of cash to spend. It is where you and your family live; therefore, you should not use it as collateral for any loan outside of a first mortgage, absent some dire need (such as potential medical expenses, etc.).
- Whenever you make a purchase, even large purchases like homes and cars, pay discount prices whenever possible. It will take time to find favorably priced assets and goods, but it is time well spent.
- Pay close attention to interest rates, both the interest rates you pay (such as mortgage rates, car loan rates, credit card rates, etc.) and the interest rates you earn (from bank savings accounts, 401K plans, individual retirement accounts (IRAs)), etc.
- Limit the purchase of “leisure goods,” and fund such purchases with cash rather than credit. In general, use consumer credit sparingly and remember to watch both the credit terms and the interest rates you are charged when you use it.
- Saving money is important, and it will get the power of “compound interest” (or interest paid on interest) working for you over time. The sooner you start to save, the better—even if the amounts you save are small.
- There is NO easy way to become wealthy so you have to be “radically skeptical” when making all personal investments. This is particularly important when dealing with anyone who tells you there is an easy way to become wealthy because such people either do not know what they are talking about or they are frauds.
- Size matters so, absent very compelling reasons, you should generally only invest with large money management firms. Large firms tend to have large assets of their own, and large amounts of insurance coverage to protect those assets in the event they are sued. Having assets and insurance available to pay legal judgments helps to mitigate the risk of a loss in the event something goes wrong. Regrettably, things can go wrong with investments for any number of reasons.
- Don’t put all of your investment eggs in one basket. To the extent your savings portfolio begins to grow, you should generally diversify your investment funds across different money management firms and asset classes. For example, have one money management firm invest equities for you and another money management firm invest bonds for you, etc.
- Ignore “the Joneses.” Many people feel under pressure to keep up with the spending patterns of family or friends. This is a mistake for a variety of reasons, primary amongst these is that the people you may be trying to keep up with may not have made well-thought-out purchases and/or may not have funded those purchases well.
- If you are defrauded, contact law enforcement immediately. Do not delay because of feelings of embarrassment. You should not feel embarrassed; rather, take action quickly in the hopes of getting at least some of your money back and to bring the fraudster to justice.