Personal finance fads come and go almost weekly these days, but some timeless pearls of financial wisdom will always ring true. Money has taken various forms over the centuries. It stands to reason that certain truths have been discovered along the way that tell people how to make the most of their monetary assets.
Here are 10 timeless money rules that you should always live by:
1. Manage risk intelligently.
Unless you have a very high income and save a large percentage of it by living frugally, you will never amass real wealth putting all your money in a savings account.
● With nominal interest rates below 1%, and real interest rates negative, cash in a savings account will simply be eaten away by inflation over time. Even with today’s lofty stock market valuations and low bond yields, you need to chase risk to some degree if you want your wealth to grow.
2. Keep an emergency fund well stocked.
If you can’t handle everyday hiccups with cash from your savings, adding debt can put your future in jeopardy. You’ll want to avoid dipping into your retirement savings and income assets to cover short-term problems or you’ll forever be chasing lost ground.
Putting all your eggs in one basket can be a disaster if something were to happen to that basket. Remember that in order to recover a 50% loss, you need to make a 100% return with the balance just to get back to even. As we saw after the 2000 and 2008 market crashes, this can take a decade or more.
4. Patience is virtue.
The most successful investors spend very little time buying and selling stocks. They research, plan, and prepare to make moves into and out of the market. They plan ahead with an entry point and exit point for every position. Most of the time they wait for multiple signs to flash green before making a move.
● Roughly speaking, a 7% annualized return will double your money every 10 years. Boost that to a 10% return and you can double your money in 7 years. Do this again and again with increasingly larger sums of money and you’ll build real wealth over a lifetime.
5. Avoid market-timing.
Every market, whether overbought or oversold, has bargains to be found. Many stocks did very well during the financial crisis. Don’t wait! The best time to invest is today.
6. Be a cheapskate.
When paying for managed investments like mutual funds, find those with very low fees. Many index funds hold the same stocks, so why pay more? It’s rare that buying front-loaded mutual funds will be worth the added cost.
7. Buy low, sell high, but pay for quality.
The goal is always to buy low and sell high, but it’s better to buy near the bottom or sell near the top than to miss out at the absolute peak on either end. Over a long time period, a few percentage points from the low or high won’t matter. What does matter is to avoid catastrophic losses.
8. Do something.
Don’t waste time wishing and hoping for your financial life to improve. Make a plan and start executing it today.
9. Take on debt wisely.
Debt is a double-edged sword. Debt used to leverage returns, can make you financially free over time. Debt used to make needless consumer purchases and pay high interest rates on them can be a wealth killer.
10. Do everything you can to legally avoid taxes.
Minimizing your tax bill will leave you more money to invest and earn a return on. The IRS will do everything in their power to take as much money as possible from you. Don’t sit idly by and fork over your earnings. Learn the rules to their game and play by them to your advantage. If you don’t have time to learn the ins and outs, find someone who does and pay them for their advice.
All games follow a set of rules and money is no different. Are you following the right rules? Are there any rules you are violating? If you simply live by these 10 rules, you’ll be well on your way to mastering money.