Animal Spirits Podcast - Book Excerpt: The 20 Rules of Personal Finance

Episode Date: December 5, 2020

Ben reads a chapter from his new book, Everything You Need to Know About Saving For Retirement. Learn more about your ad choices. Visit megaphone.fm/adchoices

The following comes from my new book, Everything We Need to Know About Safe for Retirement. This is Chapter 23 to 20 Rules of Personal Finance. Picture yourself getting ready for a Clark Griswold-style family summer vacation. You have an itinerary all laid out for every stop along the way, including the hotels you'll stay at, the sites you'll see, even some Yelp reviews for the various restaurants you plan to eat at on your trip. The day finally arrives and the anticipation is building. Everyone piles into the minivan, ready to go until someone realizes, is dad forgot to fill up the gas tank, no one packed their suitcases,

someone forgot to pack the snacks, and there isn't a single iPad on board to keep the kids happy in the backseat. The finance equivalent here is coming up with the world's greatest investment strategy without saving in the first place. Yes, investing is important if you'd like to compound your wealth over time, but it doesn't matter if you're the second coming of Warren Buffett if you can't save money and get your personal finances in order first. The whole point of this book is to drive home the importance of personal finance and saving,

so just to sum up, I wanted to provide Ben's 20 rules of personal finance to hammer home. these points. Number one, avoid credit card debt like the plague. The first rule of personal finances 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 wealth. Obviously, not all debt is bad, but credit card debt is by far the worst. If you carry a credit card balance on a regular basis, you're definitely not ready to invest for money in the markets. Number two, but building credit is important. Some of the biggest expenses over your lifetime will likely be the interest costs on your mortgage, car loans, and student loans. So having a solid credit score can save

tens or even hundreds of thousands of dollars by lowering those borrowing costs. So use credit cards to build a solid credit history, but always pay your balance off each month. One of the best ways to do this is to automate all your bills, pay them with a credit card, and then automatically pay off that credit card each month. Number three, income is not the same thing as savings. There's a huge difference between making a lot of money and being wealthy, because net worth is more important than how much you make. It's amazing how many people don't realize this simple truth. 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. Anyone can spend money to appear wealthy, but true wealth comes from the absence of spending in the form of saving. Number four, saving is more important than investing. Pay yourself first as such simple advice, but so few people do this. One of the best investment decisions 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 or stock market performance or who the president is or the timing of recessions in bare markets or what the Fed does, but you can control your savings rate. Number five, live below your means, not within your means.

The only way to get ahead financially is to consistently stay behind your own earnings power. Living within and above your means is a great way to live paycheck to paycheck. The only way to truly get ahead is by living below your means and setting aside a portion of your income for the future. Try to think about this in terms of the time you can buy yourself in the future to do what you want when you want to do it. Number six, if you want to understand your priorities, look 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 the things that are important to you, but cut back everywhere else.

And if you pay yourself first, you don't really have to worry about budgeting. You just spend whatever's left over on the things that matter to you. Number seven, automate everything. The best way to save more, avoid late fees, and make your life easier is to automate as much as much as much as much. much of your financial life is possible. The goal is to make the big decisions up front, so you don't have to waste so much time, energy, and willpower tending to your finances over time. It probably takes me an hour or so to keep track of my family's budget every month because everything is on autopilot. Number eight, get the big purchases right. I know I shouldn't

be so judgmental, but anytime I see a $70,000 SUV on the road, I think, I wonder how much that person has saved for retirement. Personal finance experts love to debate the minutiae of brown bag lunches and lattes, but the most important purchases in terms of keeping your finances in order will always be the big ones, and those two are housing and transportation. Over-extending yourself on these two purchases is going to be a killer because they represent fixed costs and come with more ancillary expenses than most people realize. Number nine, build up your liquid savings account. You know, I don't even like calling it an emergency savings account anymore, because every time

these quote-unquote emergencies come up, most of the time there's things you can plan on happening periodically anyway. 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, health care scares, they never occur on a set schedule, but you can still plan on paying for these events by setting aside small amounts of money each month to better prepare yourself when life gets in the way. Number 10. Cover your insurable needs. My friend and colleague Jonathan Novi 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. Just remember, though, insurance is about protecting wealth, not building it. always get the match. I can't tell you how many times I've talked to people who aren't saving enough in their 401k plan to get their employer match. This is like turning down a portion of your paycheck each payday. I'd love to see more people be able to max out their retirement contributions, but at a minimum, you should always, always, always save enough to get the match so you're not leaving free money on the table. Number 12, save a little more money each year. A few people have the means to

immediately reach my goal of saving 10 to 20% of their income each year. So the trick is to increase your savings rate a little bit every year every time you get a raise, so you never even noticed you had that money to begin with. Avoiding lifestyle creep can be difficult, but that's how you build wealth over time. Number 13. Choose your friends, neighbors, and spouse wisely. Robert Chaldini has written extensively on the concept of social proof and how we mirror the actions of others to gain acceptance. Trying to keep up with spend through friends and neighbors is a never-ending game with no true winners. Find people to spend your life with who have similar money uses you, and it will save you a lot of unnecessary stressed envy and wasteful spending. Don't

worry about keeping up with the Jones is as much as following your own path. Number 14. Talk about money more often. It takes all of five minutes these days before I hear politics brought up in almost any conversation, 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 nearly every aspect of your life in some way. It's way too important to ignore and sweep under the rug. Number 15, material purchases won't make you happier in the long term. True wealth is all the stuff you don't waste money on. Plus, experiences give you a better bang for your book

and time spent with people you love is one of the best investments you can make. Number 16, read a book or 10. There are countless personal finance books out there. This is one of them. If it bores you to death, then at least scan through a few and pick out the best pieces of advice from a few different sources to test them out. This stuff should be taught

in every high school and college, but it's not. So you have to take the initiative. No one is going to care more about your money than you. Invest some time, money, and energy into yourself. Number 17. Know where you're standing. and everyone should have a back of the envelope idea of their true net worth. Before knowing where you want to go, you have to know where you are.

That means adding up all your assets, subtracting any debts. This way you can set some general expectations about future savings rates, market returns, portfolio growth to give yourself some goalposts for the future. And since reality doesn't always sync up with expectations, this allows you to make some course corrections along the way to your financial plan. Number 18. Taxes matter. I think everyone should probably try to do their own taxes at least a once in their life just to understand how it works.

I know it can be ridiculously complicated, but it can help you. save money over time if you know where to look. The point is to take advantage of as many tax breaks as you can and always understand your personal tax situation. Taxes should never act as the be-all end-all when making saving and investment decisions, but they definitely deserve a seat at the table. Number 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. Far 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. I think that's nonsense. You must learn

how to sell yourself, improve your skills, and negotiate a higher income over time. A $10,000 raise early in your career could be worth hundreds of thousands of dollars over the course of your lifetime. Number 20. Don't think about it in terms of retirement, but financial independence. The goal shouldn't be about making it to a certain age so you can ride off into the sunset instead of the beach and sip dachries, but rather get into the point where you don't have to worry about money as much anymore.

Time is the most important asset in the world because you literally can't manufacture more of it. Retirement is still a concept that's always evolving and no one really knows how they feel once they reach that mythical age. But becoming financially independent allows you to make decisions about how to spend your time on your own terms. That was Ben's 20 Rules of Personal Finance. If you liked what you heard here, again, be sure to check out my new book, everything you need to know about saving for retirement.