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The seven laws of personal finance still apply
The financial services industry wants us to think that investing and personal finance are complicated. That was the approach in the late 1960s when I started writing about personal finance. This was still the approach in the late 1970s when I became a newspaper columnist, so long ago that my first columns were written on a Royal Office typewriter.
Complication continues to be an important marketing tool today, supported by academics with ever-increasing computing power, ever-larger databases, and a sophistication in mathematics and statistics that boggles the mind.
But the Seven Laws of Personal Finance were good 50 years ago. AND they are fine today. Better yet, the arrival of index investing, exchange-traded index funds, and the elimination of commissions have made it incredibly easy and inexpensive to be a successful saver and investor.
Related:Scott Burns: Do you have your assets in the right place for 2024?
Here are the seven laws, valid for at least another half century:
Spend less than you earn. Millions of people still do not understand this simple principle, choosing instead to believe they can borrow their way to security and wealth. But unless you spend less than you earn, you won’t have money to invest and all talk about personal finance will be fruitless.
Make your savings automatic. Saving is not something you do with your leftover money. There is no surplus money. Savings should be as real and constant as buying food or paying your mortgage. The best way to do this is to organize your finances so you never see the money. This means using a 401(k) plan to the fullest if you have one. Or arrange automatic transfers to an investment account.
Get free money. Many people who would drive miles for a sale routinely leave easy money on the table. They do not take advantage of company-provided 401(k) or 403(b) plans. The first benefit is tax deferral. The second is the dollars often contributed by employers.
Keep getting your money back. Share as little as possible with the tax authorities. And be strict with your commissions or consulting dollars. Earning a high return on your investments will only be good for you if you earn the return. If you take the risk and someone else gets a guaranteed return in fees, you are losing money.
I owe as little as possible. There was a time when owing some money was a good idea. That time has passed. Mortgage debt must be paid off within 15 years if possible, and nondeductible debt must be avoided or paid as quickly as possible. Credit card debt is pure poison.
Trust the power of average. For the few who desire great wealth, competition for the highest returns is essential. For the rest of us, it’s just necessary to participate in broad wealth creation. This means favoring major index investments unless there is a compelling reason to bet on a particular competitor in the competition for wealth creation.
Take care of your own garden. The preferred illusion is that someone somewhere else has opportunities that are not available to normal people. We have limited control over the return on our investments. But we have great control over how much money we invest and where we invest it.
This version of the seven laws was first printed in January 1997. “Tend your own garden” replaced an earlier expression that meant the same thing: Don’t invest in Afghanistan. Even years before 9/11, warnings about Afghanistan seemed too specific. History shows that investing in our country has only been good for us. Diversification in the United States has been very good for people in other countries.
That is all?
Yes, to the world of money.
But there is another set of rules that is rarely discussed. These are the No-Money Rules, the rules of life that reduce, but never eliminate, our need for money. They are the rules for living in our vast invisible economy of care, education and service.
Stay tuned.
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