Eleven Elementary Rules of Personal Finance

2024-09-30 by Uncle Todd 206 Comments

I like principles. I like rules. I don’t always follow them, mind you! And I certainly know when to purposely break them, in order to get where I need to be, or do what I need to do. However, I like getting knowledge that has been ‘tested’ out by people who came before me. Knowledge transferred saves me having to learn lessons the hard way.

As far as I can tell, there are some pretty solid lessons learned over Human history that can pretty much, be universally applied to wealth building. In other words…The more you follow these “rules,” the better your financial situation will become.

Spend less than you earn
- The single most important rule of personal finance.
- Break it under no circumstances.
Keep everything as simple as possible
- Simplify. Cancel some of those cards. Roll over some of those investments. Consolidate some of those debts.
- The more credit cards you have, the more chances you have for identity theft.
- The more credit cards the more chances you have to miss a payment.
- The more investment accounts you have, the less attention you can give to each one and the more likely it is that you’ll miss a big problem.
- The more accounts and investments and bills that you have, the more time and energy you have to spend to stay on top of it all and the more likely that you’ll make an error.
Don’t assume you’ll be able to solve today’s problems tomorrow.
- Don’t make bad spending choices today thinking you’ll make more in the future. That’s a surefire way to fail. Even if future you does get a raise, you’ll likely have other costs that you’ll have to deal with.
- Time isn’t magic, unless we’re talking about compound interest!
Focus on eliminating high-interest debt
- Set up a simple debt repayment plan by organizing your debts by interest rate, then attempt to make a double payment (or more) on the debt with the highest interest rate.
- Make that increased payment every month until that debt is gone, add the total amount of that payment to the payment you’re making on the next debt on the list.
- Keep repeating until your high-interest debts are gone.
Build an emergency fund
- Keep your powder dry.
- A sufficient emergency fund allow you to maintain your savings when short term interruptions in income arise. And they always do.
- Cash is king for solving all of the problems life throws at you. Keep enough available to float you through the bad times.
Save the max for retirement
- First 401(k) plan at work.
- If you don’t have a 401(k) at work, set up your own Roth IRA account.
  - Use Vanguard or Fidelity.
- Increase your contribution until you max out.
- At a minimum, first save up to the match. Only fools turn down free money.
- Contribute to your IRA until you max out.
Buy term life insurance to cover your dependents
- You don’t need much life insurance unless you have dependents (meaning people besides you whose well-being directly rely on your income).
- If you do have dependents, your best bet is to get a term life insurance policy, one that will pay out enough money to care for your dependents in the event of your early passing.
Ignore “professional” stock pickers
- Most all stock pickers can’t beat the market consistently over decades.
- The cost of their “services” outstrips the profits their services deliver.
Request rate reductions on your debts, especially credit card debts
- For credit cards, it’s as easy as simply calling up your credit card company and asking for a reduction.
- For other bills, such as student loans, a consolidation can lower your interest rate.
- With your mortgage, a refinancing can reduce your rate dramatically.
Buy some international investments, too
Review your finances, your career, and your life once a month
- This may seem overly simple, but it has brought about countless transformations in my life. Once a week, I spend an hour reviewing the week that has gone by as well as thinking ahead to the week that is to come and my long-term goals.
- Am I doing things that are in line with those goals? What are the best things I did this week in terms of where I want to be going? What were the worst things, and why did I do them? How can I avoid doing them in the future? Am I still happy with my big goals? Spend real time thinking about those things every week and you’ll feel a positive transformation in your day to day life.