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.