The 20 most important personal finance laws to live by

You could be the second coming of Warren Buffett as an investor but it won’t matter if you can’t save money and get your personal finances in order first. Saving money will always be more important than investing. As the saying goes, you have to crawl before you can walk. As a professional investor and money manager I constantly get questions from friends and clients about what they should be doing better. Here, I’ve distilled it down to 20 rules:

1. Avoid credit card debt like the plague

The first rule of personal finance is to never carry a credit card balance. Credit card borrowing rates are egregiously high and paying those rates is an easy way to negatively compound your net worth. If you carry credit card debt for a prolonged period of time, you’re not ready to invest your money in the markets.

2. Building credit is important

Likely the biggest expense over your lifetime will be interest costs on your mortgage, car loans and student loans. Having a solid credit score can save you tens or even hundreds of thousands of dollars by lowering your borrowing costs.

3. Income is not the same as savings

There is a huge difference between making a lot of money and becoming wealthy because your net worth is more important than how much money you make. Having a high income does not automatically make you rich; having a low income does not automatically make you poor. All that matters is how much of your income you set aside, not how much you spend.

4. Saving is more important than investing

Pay yourself first is such simple advice, but so few people do this. The best investment decision you can make is setting a high savings rate because it gives you a huge margin of safety in life. You have no control over the level of interest rates, stock market performance or the timing of recessions and bear markets but you can control your savings rate.

5. Live below your means, not within your means

Living within or above your means is how you end up going from paycheck to paycheck without every truly building wealth. The only way to get ahead is by living below your means and setting aside a portion of your income for the future.

6. If you want to understand your priorities look at where you spend money each month

You have to understand your spending habits if you ever wish to gain control of your finances. The goal is to spend money on things that are important to you but cut back everywhere else. And if you pay yourself first you don’t have to worry about budgeting, you just spend whatever’s leftover on the things that truly matter to you.

7. Automate everything

The best way to save more, avoid late fees, and make your life easier is to automate as much of your financial life as possible. The goal is to make the big decisions up front so you don’t need to waste so much time and energy tending to your finances.

8. Get the big purchases right

I know I shouldn’t be so judgmental but whenever I see $50-$70k SUVs on the road or enormous McMansions the first thing that pops into my head is, “I wonder how much they have saved for retirement?” Personal finance experts love to debate the minutiae of lattes but the most important purchases in terms of keeping your finances in order will be the big ones—housing and transportation. Overextending yourself on these two purchases can be a killer because they represent fixed costs and come with more ancillary expenses than most people realize.

9. Build up your liquid savings account

Your monthly budget should take into account the fact that there are infrequent, yet predictable expenses you’ll need to take care of on occasion. Weddings, vacations, car repairs and health scares never occur on a set schedule but you can plan on paying for these events by setting aside small amounts of money each month to better prepare yourself when life inevitably gets in the way.

10. Cover your insurable needs

My friend and colleague Jonathan Novy likes to remind me that people buy insurance because there will be a financial impact on their business or family if they were to die or become disabled. The idea is to measure that impact in dollars, and if possible, insure against it.

11. Always get the match

I can’t tell you how many times I’ve talked to people who aren’t saving enough in their 401(k) plan to get the employer match. That’s like turning down a portion of your paycheck each payday. At a minimum you should always save enough to get the match so you’re not leaving free money on the table.

12. Save a little more each year

The trick to saving more money over time is to increase your savings rates every time you get a raise so you’ll never even notice you had more money to begin with. And the sooner you begin setting money aside, the less you end up realizing it never made it to your checking account to be spent in the first place.

13. Choose your friends, neighborhood and spouse wisely

Trying to keep up with spendthrift friends or neighbors is a never-ending game with no true winners. Find people to spend your life with who have similar money views as you and it will save you a lot of unnecessary stress, envy and wasteful spending.

14. Talk about money more often

It takes all of 5 minutes before I hear about politics in almost any conversation these days, but somehow money is still a taboo subject. Talk to your spouse about money. Ask others for help. Don’t allow financial problems to linger and get worse. Money is a topic that impacts almost every aspect of your life in some way. It’s too important to ignore and sweep under the rug.

15. Material purchases won’t make you happier in the long run

Buying stuff won’t make you happier or wealthier because true wealth is all of the stuff you don’t waste money on. Experiences give you a better bang for your buck and time spent with the people you love is one of the best investments you can make. 

16. Read a book or 10

There are countless personal finance books out there. This stuff should be taught in every high school and college, but it isn’t. No one is going to care more about your money decisions than you. Invest some money, time, and energy into yourself. It’s the best investment you can make.

17. Know where you stand

Everyone should have a back-of-the-envelope idea of their true net worth. That means adding up all of your assets and subtracting any debts. This way you can set some general expectations about savings rates, market returns and portfolio growth to give yourself some goalposts in the future.

18. Taxes matter

Take advantage of as many tax breaks as you can and always understand your personal tax situation. The biggest lay-ups in this category include taking advantage of as many tax-deferred savings vehicles as humanly possible and keeping your trading to a minimum when investing in taxable accounts to avoid paying higher short term capital gains taxes.

19. Make more money

Saving and/or cutting back is a great way to get ahead, but it’s an incomplete strategy if you’re not trying to earn more by enhancing your career. Too many people are stuck in the mindset that there’s nothing they can do to get a better job, take on more responsibilities or earn higher pay. That’s nonsense. You must learn how to sell yourself, improve your skills and negotiate a higher income over time.

20. Don’t think about retirement, but financial independence

The goal shouldn’t be about making it to a certain age so you can ride off into the sunset, but rather getting to the point where you don’t have to worry about money anymore. Retirement is a concept that is still evolving and no one knows how they’ll feel once they reach that age. Becoming financially independent allows you to make decisions about how you spend your time on your own terms.

This is an excerpt from Carlson’s new book Everything You Need to Know About Saving For Retirement.

Ben Carlson is the director of institutional asset management at Ritholtz Wealth Management. He may own securities or assets discussed in this piece.