10 Commandments of Personal Finance

If any of you are fans of the Freakonomics Radio podcast, you may be familiar with Harold Pollack’s ten rules to be financially literate. I have them printed on a little business card in my wallet, so I can always have a reference on-hand when I need to make an important financial decision. Is this the most embarrassing thing in my wallet? Yes! Has the card in handy before? You bet your bottom dollar!

And so, without further ado, I present to you The Ten Commandments of Personal Finance:

1) Strive to save 10-20% of your income.

Save as much as you are able to do, starting with at least 10%. It may be tough, but trust me, if you aren’t saving any money, every other aspect of your life is going to be a lot tougher.

2) Pay your credit card balance in full every month.

This is a fundamental aspect of building a solid credit score. A good credit score will help you secure low-cost financing for future big-ticket purchases like a house and/or a car. Check out Building a Credit House Pt. II for more good credit habits.

3) Max out your 401(k) and other tax-advantaged savings accounts.

Oftentimes your employer will kick in a matching contribution up to a certain %, which is free $$$ you should be taking advantage of. If you are unsure how to set up an automatic 401(k) contribution from your paycheck or take advantage of your company match, go harass your HR department. That’s what they’re there for.

Other tax-advantaged savings vehicles include the 529 for your spawn’s education and Health Savings Accounts (HSA) that helps you save for both planned medical expenses and emergencies.

4) Never buy or sell individual stocks.

I don’t adhere to this rule, even though I definitely should. My single stock selections are riskier than playing dentist with a crocodile. This ties into rule number 5.

5) Buy inexpensive, well-diversified index mutual funds and exchange-traded funds (ETFs).

One of my favorite anecdotes is that a monkey with a dartboard filled with stocks will outperform most active fund managers. If you don’t have the time or desire to conduct market research to monitor a curated portfolio, then don’t. Over the course of a weekend, you can create a highly diversified, extremely inexpensive portfolio of ETFs and indexed mutual funds that will outperform 95% of active investment advisers. A few different types of index funds – growth, value, international, large-cap, small-cap, and some good bond funds – are a great foundation. As Jack Bogle, the founder of Vanguard says,

“You want to capitalize on the magic of compounding returns without succumbing to the tyranny of compounding costs.”

6) Make sure your financial advisor is a Certified Financial Planner (CFP®).

The Department of Labor recently repealed the Fiduciary standard law, which protected your best interests as a consumer by preventing your Financial Advisor from selling you products that didn’t act in your best interest. Without government protection, you should seek out a CFP® for financial advice because they are obligated by their title and the CFP® board to adhere to the fiduciary standard anyway. Certified Financial Planners must pass an 18-month rigorous curriculum and pass an exam similar to the BAR in order to earn the designation and they are the most qualified professionals to give you sound financial advice. Check out the CFP Board website to find a CFP® in your area.

7) Buy a home when you are financially ready.

For many, a home is the most leveraged, least diversified asset you will ever own. You want to be as thoughtful as possible when you make this purchase. You want to have at least a 20% down payment, which means you can negotiate better terms on your loan and avoid extra costs like mortgage insurance. You should buy a home with a mortgage you can afford monthly payments on in an area that is likely to grow in the future. You should also leave a “strategic reserve” in your savings account in case anything goes wrong after you move in, like a popcorn fire that consumes your microwave or ruptured pipe that replicates Old Faithful in your living room. (True stories.)

8) Make sure you’re protected with appropriate insurance policies.

You need to be insured for a life-changing event – like if that fire had consumed my whole kitchen, or worse. Life insurance helps to support those that depend on you in case you die. Liability insurance protects your car from all the other terrible drivers on the road.

In general, get the largest deductible that you can. First of all, it costs money for the insurer to honor all the smaller claims and you don’t want to have increased premiums for that. Secondly, those with high-deductible insurance know that they’re pretty unlikely to actually use it. This puts you in an insurance actuarial pool that is more favorable than those with low-deductible plans, ie. lower monthly premiums. Remember: insurance should be used to protect against the big, life-altering events, not the little inconveniences.

9) Support the Social Safety Net.

I know, I know, if you’re conservative, you probably just tuned out, but bear with me for a second. What I really mean by this is: pay your taxes. As Americans, it is important that we have each other’s backs to protect each other from the risks that would crush any one of us if we had to face it alone. Unemployment, Social Security, etc. are crucial economic tools that help keep many people afloat during challenging economic periods. A vast majority of those who rely on these programs are honest, good people and it is our responsibility – as financially stable citizens of the United States – to ensure that everyone has access to the social safety net so that they can bounce-back and ultimately contribute back to society. Pay it forward.

10) Remember the 10 Commandments of Personal Finance.

It’s like the opposite of Fight Club’s Rule #1 (and #2).

You can jot these down on an index card or a laminated business card and keep them in your wallet, or place them on the fridge next to your relatives’ Christmas cards. Stick to these rules and your financial stability is bound to improve.

Budgeting Bytes

Let’s face it, most of us hate budgeting. It ranks right up there with traffic and taxes (more on that to come). We all know at least one person who likes crunching their expense numbers and spreading out their Excel sheets. For fun, let’s call them Count von Count. Count knows where every penny goes, I guarantee it, but for the bulk of the population, things are a bit fuzzier. It’s like keeping a food diary to lose weight – it quickly becomes a dull chore. Luckily there are some #lifehacks and FinApps (cue eye-roll) that free us from the oppression of spreadsheets and calculators.

First off, the #hacks. One of my favorites is a rule of thumb called the 50-20-30 rule. The gist is as follows: 50% of your take-home pay is slated for fixed cost necessities (rent or mortgage, insurance, utilities, transportation, food, telephone, etc.).  20% is aimed at savings or financial goals (paying down debt, emergency fund, travel fund, house down payment fund, and so on). Notice that we’re using take-home pay, so any money that goes into your work 401k isn’t included in this number, which means you may end up saving over that 20%. Squadddddd.

The remaining 30% is discretionary. All up to you. Get yourself a haircut (you hippie); Blue Bottle Coffee (pls sponsor me); buy a new smartphone without a cracked screen; a  Netflix account so you can stop using your friend’s; it’s about time you get a PRIME membership; etcetera; etcetera.

That’s it. Just kick back and divvy up your check to cover those three categories. Ideally, you should automate as much of these as you can (particularly the savings portion) so that budgeting takes care of itself. That’s where solid budgeting applications take the wheel. Disclaimer: I’m not sponsored by the apps I’m about to recommend, but I use them in my day-to-day and can vouch for them 100p.

 consolidates your credit cards, bank accounts, bills, etc. into a single intuitive platform. Mint lets you know when bills are due and sends you payment reminders so you can avoid late fees. You can create a budget on the app (follow the above rules) and based on your spending habits, Mint even gives you specific advice to gain more control over that budget. The free credit score is a nice bonus, too.

 If you are an investing novice, Acorns is the best way to utilize the benefits of automating your new financial good behavior. Every time you make a purchase with a card connected to the app, Acorns rounds it up to the next dollar and automatically invests the difference in a portfolio of low-cost exchange-traded funds (ETFs) that you select based on your risk preference. (I’ll go in depth into ETFs in future posts, stay tuned!)  Acorns puts your pocket change to work earning real returns that will ultimately add up to serious $$ come retirement. The service is free to college students and charges just $1 per month for pretty much everyone else.

The more you automate the less you have to scribe in dusty ledgers or strain your eyes with spreadsheets. Except for Count von Count who finds that sort of thing fun. Oh, one more thing. It’s a good idea to check your bills about once a quarter or at least twice a year to look out for bill creep (“free trials” I’m talking about you). And checking your auto and homeowners or renters insurance every two years may save you money as well. Keeping those slippery bills under thumb can save money for the important stuff (Stranger Things anyone?).

Special thanks to my mentor, John Conroe CFP®, for collaborating on this post. He happens to be a very talented financial planner and author; check out his novel series at johnconroe.com and on Amazon.