Ten Commandments

Jonathan Clements  |  April 22, 2017

IMAGINE YOU HAD ONE SHOT at offering financial advice to a high school or college graduate. Your mission: Come up with 10 rules that’ll help your graduate succeed financially in the years ahead. What would you recommend? Here’s my list:

1. Question yourself. No doubt you’re entering the adult world with a slew of strong opinions—about what you want from life, what will make you happy, what you’re good at, what constitutes success and how to achieve it. These opinions likely won’t age well, and yet they will have a profound impact on the lifestyle you pursue, how you invest, how much you borrow and more. What to do? Some self-doubt—and a few days’ pause before major decisions—could save you unnecessary grief and a boatload of money.

2. Consider the tradeoff. Whenever you open your wallet, you’re voting for one thing, but also voting against something else. If you buy one item, those dollars can’t be spent elsewhere. If you spend it, you can’t save it. If you devote savings to one financial dream, those dollars can’t be put toward another goal.

3. Be an owner. That means favoring stocks over bonds and buying a home rather than renting. Admittedly, this isn’t without risk: Owners can suffer steep short-term losses, so don’t purchase a house or venture into the stock market unless you have at least a five-year time horizon—and preferably far longer.

4. Favor simplicity and low cost. Wall Street firms want to make money off you—and the greater the complexity, the more they’ll make. Does a financial product or strategy require more than 30 seconds of explanation? Just say no.

5. Save automatically. If socking away money were easy, every retiree would be a multi-millionaire. The reality: Most of us spend too much today and shortchange our future self, especially our future retired self. To force yourself to save, sign up for payroll contributions to your employer’s retirement plan, and also establish automatic mutual-fund investment plans.

6. Pay taxes later. The biggest investment cost is taxes. But with 401(k) plans and IRAs, you can defer those tax bills for decades, allowing you to use money earmarked for the government to earn additional gains for yourself.

7. Index. If you buy and hold a globally diversified portfolio of index funds, every year you’ll fare modestly better than most other investors. Over a lifetime of investing, that modest annual advantage will turn into a landslide victory, thanks to the power of compounding.

8. Never carry a credit card balance. Follow this one rule, and you’ll sidestep punishing financing charges and a heap of stress. Avoiding credit card debt should be a top financial priority, second only to funding a retirement plan with a matching employer contribution.

9. Protect against financial disaster. Think about the truly terrible things that can happen—losing your job, needing expensive medical care, dying young, suffering a career-ending disability. To fend off these threats, you need an emergency kit with a few simple items: some rainy-day money, health and disability insurance, life insurance if you have dependents, a will, and the right beneficiaries on your retirement accounts and life insurance.

10. Strive to be debt-free. Many of us assume a frightening amount of debt when we’re younger, thanks to student loans, car loans and mortgages. This isn’t necessarily a terrible thing—as long as we can get all this debt paid off by retirement and preferably far earlier. Shedding all debt lowers our cost of living, make it easier to pay for the kids’ college, retirement and other goals.

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