It may sound odd to say that these are the only 9 rules you need to know and then have an entire website devoted to explaining what you need to know. The excuse is that ultimately the rest of the site is just giving you the detail behind each of these items. These are the simplest rules that, if followed, will lead to financial success, regardless of income. None are complicated and despite what the financial services industry tell you, can be done entirely yourself at a minimal cost.
- Have an accessible emergency fund of six months. If an emergency like a job loss or medical issue occurs, you don’t want to go into credit card debt or even bankruptcy to pay off the debt.
- Pay off credit card, car loan and student loans. Nothing else on this list matters if you are unable to save anything or even worse, are spending more than you make.
- Save at least 10% of your money. This can be very difficult to do as a young person or in a low wage job, especially with the consumer driven, “keep up with the Jones” environment that we live in. But the 8th wonder of the world, compounding, is so much more wondrous when you are young. This is a great calculator to illustrate the value of starting early: https://retirementplans.vanguard.com/VGApp/pe/pubeducation/calculators/PowerOfCompoundTool.jsf
- Max 401k at employer or a personal IRA. If your employer offers a matching option, then contributing enough to get that full match becomes number one in this list.
- Max tax advantaged savings. There are many options for savings that have significant tax advantages like an IRA, 401k, 529 and many, many others. They can be complicated, but with some work it is easy to take advantage of them and a major missed opportunity if you do not.
- Diversified funds. There is no reason to make this complicated. There are many “couch potato” portfolios that take zero maintenance and hold only three asset types: US Stocks, Bonds and International Stocks. You will outperform almost all professional money managers over the long run with very little effort.
- Low expense fee index funds. High expenses are the hidden drag on retirement savings. Some mutual funds can charge as much as 1% for a product that will offer worse results than an index fund being sold by Fidelity or Vanguard at 0.04%….25 times more expensive.
- Never buy individual securities. The fundamental reality of the all investments is that when you are buying, someone else is selling. That means you must then believe you are smarter than the seller and can recognize the value in what is being purchased. Studies have consistently shown that almost no one can effectively pick individual stocks and outperform the market. Even Warren Buffett, who has outperformed the market for many decades, is even having trouble effectively buying profitable individual securities. Even he recommends the S&P Index funds as a preferred investment (https://www.cnbc.com/2017/05/12/warren-buffett-says-index-funds-make-the-best-retirement-sense-practically-all-the-time.html). We’d all like to believe we are better than average, but when even the best money manager in the world can’t beat the market consistently, there is no way we can either. This is a hard pill for many to swallow.
- If you feel you need a Financial Advisor, make them commit to a fiduciary standard. This means that they are working in your best interest and not theirs. While this may seem obvious, this is not traditionally how the financial services industry works.