My Rules for Creating a Solid Financial Future

Yesterday's (5/17/08) New York Times featured an article by Ron Lieber titiled, "Five Basics for Building a Solid Financial Future.") This reminded me of other "summary rules" posts I've seen, most notably the two below:

http://www.thesimpledollar.com/2007/11/29/everything-you-ever-really-needed-to-know-about-personal-finance-on-the-back-of-five-business-cards

http://blog.mint.com/blog/finance-core/three-principles-of-personal-finance-all-you-need-to-know-for-financial-success .


After thinking long and hard (and based on these and other readings!), I have compiled my own list of rules.

1. Spend less than you earn. (You can do this by either or both spending less and by earning more.)
2. Be prepared for the unexpected.
3. Know your goals, and allocate risk accordingly.
4. Invest primarily using index funds.
5. Only get into debt when it is leverage on an investment.
6. Automate billpaying and investing as much as possible
7. Adjust the price of items to reflect their cost to you in time spent working before you decide whether to pay it (adjust upwards to reflect both income taxes and the additional costs you incur by working; a good approximation for many working middle class people will be a 50% increase).
8. Know what you are buying, which is not necessarily what they are selling (ATT is selling "relationships" with "Reach out and touch someone," but you are only buying a phone service; cosmetics are selling the vision of yourself as sexy and desirably but you are only buying a lipstick), and get what you pay for (be a good consumer advocate for yourself; ask for service, make returns if the product is unsatisfactory).
9. Use the power of time to make your money go further (take advantage of compound interest on investments; give yourself a day's delay to limit impulse spending).
10. The ultimate financial goal is financial independence.
11. Invest not only financially, but in relationships, self-development, and in your health.
12. In deciding what to spend or invest your money in, remember that making a decision that is "good enough" rather than "the best possible decision" maximizes satisfaction (Schwartz) and that, in the end, people value experiences more than material goods (Van Boven), regret things not done more than the things that they have done (Gilovich), and will often end up happier than they expected with difficult decisions due to the operation of the psychological immune system (Gilbert) (the names cited are the psychologists who have done relevant research).


*To earn $30 to spend, you need to earn more than $30 because of taxes--federal, state, and local income taxes, Social Security and Medicare, state unemployment insurance--totalling these together, using the average rather than the marginal federal tax rate will approximate 25% of income for most people, so you need to earn 1.25 * $30 = $37.50 to have $30 to spend, just by adjusting for taxes.
But one also must consider that one spends a lot of money to earn money (as is elaborated in Joe Dominguez's and Vicky Robbin's Your Money or Your Life, from whom this next idea is taken)...one spends on increased transportation costs (gas, parking, increase depreciation and repair), increased food costs (more meals out and prepared food bought at the grocery store because you don't have time to cook), increased costs for clothing (professional clothing, dry cleaning, professional haircuts, cosmetics), and increased "stress reduction costs" (massages, vacations that you need because you're stressed from working), and increased technology/communication costs from trying to keep up with the pace of business life, not to mention child care costs for those who have children (or even in some cases, "fur kids"). Say that those expenses total 20% of your total spending.
Dividing 37.50/26 yields 1.5, or a 50% premium on the stated price--what you really need to earn in order to pay it.