The financial services industry wants us to think that investing and personal finance is complicated. That was its approach in the late 1960s, when I started writing about personal finance. It was still the approach in the late 1970,s when I became a newspaper columnist, a time so long ago that my first columns were written on a Royal office typewriter.
Complication continues to be a major marketing tool today, supported by academics with ever greater computing power, ever larger databases and a sophistication in math and statistics that boggles the mind.
But the Seven Laws of Personal Finance were good 50 years ago. And they are good today. Better still, 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.
Here are the seven laws, good for at least another half-century:
Spend less than you earn. Millions of people still don’t grasp 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 any money to invest and all talk about personal finance is fruitless.
Make your saving automatic. Saving isn’t something you do with money that is left over. There is no such thing as leftover money. Saving must be as real and constant as buying food or paying the mortgage. The best way to do it is to arrange your finances so that you never see the money. That means using a 401(k) plan to the hilt if you have one. Or arranging to make automatic transfers to an investment account.
Take free money. Many people who would drive miles for a sale routinely leave easy money on the table. They don’t take advantage of company-provided 401(k) or 403(b) plans. The first benefit is tax deferral. The second is the dollars frequently contributed by employers.
Keep the return on your money. Share as little as possible with the taxman. And be tight-fisted with your commission or advisory dollars. Getting a high return on your investments is good for you only if you get the return. If you get the risk and someone else gets a guaranteed return in fees, you’re losing money.
Owe as little as possible. There was a time when owing some money was a good idea. That time is long gone. Mortgage debt should be paid off in 15 years if possible, and non-deductible debt should be avoided or paid off as soon as possible. Credit card debt is pure poison.
Trust the power of average. For the handful who want great wealth, competition for the highest returns is essential. For the rest of us, it is only necessary to participate in the broad creation of wealth. That means favoring major index investments unless there is a compelling reason to bet on a particular competitor in the contest of wealth creation.
Tend your own garden. The favored illusion is that someone else somewhere else has opportunities that are not available to regular folks. We have limited control over the return on our investments. But we have great control over the amount of money we invest and where we invest it.
This version of the seven laws first saw print in January 1997. “Tend your own garden” replaced an earlier expression meaning the same thing: Don’t invest in Afghanistan. Even years before 9/11, warning about Afghanistan seemed too specific. History has shown that investing in our country only has been good for us. Diversification in the United States has been quite good for people in other countries.
Is that all there is to it?
Yes, for the world of money.
But there is another set of rules that is seldom discussed. They are the Rules of Un-Money, the rules for living that reduce, but never eliminate, our need for money. They are the rules for living in our vast invisible economy of care, nurture and serving.
Stay tuned.
