The 10 Commandments of Money

1. Create a realistic budget using the 50/30/20 rule

You aim to limit your "must-have" expenses to 50 percent of that after-tax figure.

Understand your expenses. The 50/30/20 budget allocates 50% of your after-tax income to necessities (housing, food, utilities), 30% to wants (entertainment, dining out), and 20% to savings and debt repayment. This flexible framework allows you to balance current needs with future financial security.

Implement the plan. Start by tracking your spending for a month to identify areas for improvement. Adjust your expenses to fit within the 50/30/20 framework, which may require tough choices like downsizing housing or reducing discretionary spending. Use automation to ensure bills are paid on time and savings are consistently set aside.

Regular review is crucial. Revisit your budget regularly to ensure it still aligns with your financial goals and life circumstances. Be prepared to make adjustments as your income, expenses, or priorities change over time.

2. Build financial flexibility with cash savings and strategic credit use

You can always tell the people who are new to investing. They're the ones who want to know which investments will keep their money safe while guaranteeing the highest returns.

Balance savings and credit. Aim for a combination of cash savings and available credit equal to 12 months of essential expenses. This provides a safety net for unexpected events and gives you options during financial emergencies.

Optimize your credit profile. Maintain a good credit score (740+) by paying bills on time, keeping credit utilization low, and having a mix of credit types. This ensures access to better rates and terms when you need to borrow.

Strategic credit use:

• Keep credit cards open to maintain a long credit history
• Use credit regularly but pay off balances in full each month
• Consider a home equity line of credit (HELOC) as an emergency fund option
• Be cautious with balance transfers and avoid predatory lending products

3. Prioritize debt repayment based on interest rates and type

Credit card debt is like a leech on your finances, draining away money in interest payments and leaving you vulnerable to bankruptcy.

Understand debt types. Categorize your debts into three groups:

1. Toxic debt (high-interest credit cards, payday loans)
2. Neutral debt (low-interest personal loans, car loans)
3. Good debt (mortgages, student loans with reasonable balances)

Create a repayment strategy. Focus on paying off toxic debt first while making minimum payments on other debts. Once toxic debt is eliminated, tackle neutral debt. Good debt can be paid off more slowly as it often has tax benefits and lower interest rates.

Consider debt consolidation. If you have multiple high-interest debts, explore options like balance transfer credit cards or personal loans to simplify payments and potentially lower your overall interest rate. Be cautious of fees and read the fine print before consolidating.

4. Embrace calculated risk in investing for long-term growth

Letting go of the idea that you must—or even can—beat the market is enormously liberating.

Understand risk and return. Recognize that higher potential returns come with higher risk. Diversification across asset classes (stocks, bonds, real estate) can help manage risk while still pursuing growth.

Invest for the long term. Time in the market is more important than timing the market. Regular, consistent investing through market ups and downs (dollar-cost averaging) can lead to better long-term results.

Key investment strategies:

• Start investing early to harness compound growth
• Use low-cost index funds for broad market exposure
• Adjust your asset allocation based on your age and risk tolerance
• Rebalance your portfolio annually to maintain your target allocation
• Consider target-date funds for hands-off retirement investing

5. Buy less house than you can afford and protect your equity

A home isn't really an investment.

Buy strategically. Limit your housing expenses (mortgage, taxes, insurance) to 25% of your gross income. This allows room in your budget for other financial goals and protects you from becoming "house poor."

Protect your equity. Avoid using your home as a piggy bank through excessive refinancing or home equity loans. Reserve these options for true emergencies or investments that will increase your home's value.

Home ownership considerations:

• Save for a 20% down payment to avoid private mortgage insurance (PMI)
• Choose a fixed-rate mortgage for payment stability
• Consider the total cost of ownership, including maintenance and repairs
• Don't count on rapid price appreciation; focus on the lifestyle benefits of homeownership
• If you must tap equity, use a HELOC instead of a cash-out refinance

6. Make retirement savings your top financial priority

Even a modest retirement is likely to cost a small fortune, and the only way most of us will get there is by getting time to work for us rather than against us.

Start early and save consistently. The power of compound interest means that even small contributions early in your career can grow significantly over time. Aim to save at least 15% of your income for retirement, including any employer match.

Maximize tax-advantaged accounts. Prioritize contributions in this order:

1. 401(k) or 403(b) up to the employer match
2. Roth IRA (if eligible)
3. Max out 401(k) or 403(b)
4. Taxable brokerage account

Plan for longevity. People are living longer, so plan for a retirement that could last 30 years or more. Consider strategies like delaying Social Security benefits to increase your monthly payment and exploring annuities for guaranteed income in retirement.

7. Limit student loan debt and maximize financial aid opportunities

If you're borrowing money to fund an education, the amount of debt you take on (as well as the kind of loans you get) can skew the whole education-as-investment equation.

Borrow wisely. Limit total student loan debt to no more than your expected first-year salary after graduation. Prioritize federal loans over private loans due to their more flexible repayment options and potential for loan forgiveness.

Maximize financial aid. File the FAFSA early each year to qualify for the most aid. Consider these strategies:

• Choose an affordable school or start at a community college
• Apply for scholarships and grants aggressively
• Work part-time or pursue work-study opportunities
• Explore income-driven repayment plans for federal loans after graduation

Consider alternatives. Evaluate trade schools, apprenticeships, or other career paths that may provide good income potential without the high cost of a traditional four-year degree.

8. Use insurance strategically to protect against catastrophic losses

Insurance should be thought of as your protection against true financial catastrophe, not as a buffer against the normal ups and downs of daily living.

Focus on high-impact coverage. Prioritize insurance that protects against financial ruin:

1. Health insurance
2. Auto liability insurance
3. Homeowners or renters insurance
4. Umbrella liability policy
5. Long-term disability insurance
6. Term life insurance (if you have dependents)

Optimize your policies. Choose higher deductibles to lower premiums, but make sure you can cover the deductible if needed. Regularly review and update your coverage as your life circumstances change.

Avoid unnecessary coverage. Skip insurance for things you can afford to replace, like extended warranties on electronics or collision coverage on an older car. Instead, build an emergency fund to self-insure against smaller losses.

9. Treat your marriage like a business partnership

Marriage is far more than a romantic arrangement; it has legal and financial ramifications as well.

Communicate openly about finances. Schedule regular "money dates" to discuss your financial goals, progress, and concerns. Be honest about your spending habits, debts, and financial aspirations.

Create a financial plan together. Develop shared goals and a strategy to achieve them. Consider:

• Joint and separate bank accounts
• Division of financial responsibilities
• Approach to major purchases and investments
• Retirement planning
• Estate planning and beneficiary designations

Plan for contingencies. Discuss how you'll handle financial challenges like job loss, illness, or unexpected expenses. Consider a prenuptial or postnuptial agreement to protect individual assets if appropriate.

10. Defend yourself against predatory business practices

Throughout the United States, businesses are irritating, ignoring and angering their customers—if not for fun, certainly for profit.

Stay informed. Educate yourself about common business tactics and your consumer rights. Read contracts carefully, including the fine print, before signing.

Be proactive:

• Regularly review your bills and statements for errors or unexpected charges
• Opt out of pre-screened credit offers and limit junk mail
• Use ad blockers and adjust privacy settings on digital devices
• Research companies and read reviews before making major purchases

Take action when wronged. Document issues, communicate clearly with companies, and escalate complaints when necessary. Don't hesitate to involve regulatory agencies or consider small claims court for significant disputes.

Support consumer protection. Stay informed about and support legislation that protects consumers from unfair business practices. Consider joining consumer advocacy groups to amplify your voice.

Last updated: August 8, 2024