Here we are at session number 23 , and we’re going to be talking about my ten golden rules to guarantee financial survival. We’re going for a slightly different format this week as instead of breaking things down into everything you need to KNOW and everything you need to DO, we’re going to go through my ten rules and look at scenarios where they might apply. These rules are the things I find myself repeating over and over again to clients and prospective clients; they are applicable to everyone, and to every financial decision-making situation you’ll find yourself in.

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Ten Golden Rules

It’s worth mentioning to you that this session started off being called the Five Golden Rules of Personal Finance. I even trailed it as that in last week’s session! But as I started writing it, I found that I was struggling to edit down the rules to just five, so it has become ten. I could have called it the ten commandments I suppose, but then I would have had to start them all off with ‘Thou Shalt Not’ and it would have just got silly!

I’m actually quite glad it is more than five because I wanted a bit of differentiation from Session 2 which was titled The Five Fundamentals for Financial Success. Those were more the things you had to have in place to win at this game of finance, whereas today, we’re talking about the rules of the game which you must follow if success is to be assured.

Let’s dive right in…

Golden Rule #1 – Spend less than you earn

If I had to choose only one rule which defines everything else and is the very distillation of how to win with money, this is it. All financial planning comes down to this.

That’s fairly obvious, you might say, and it is. But it might be obvious in principle, but it is still really hard to do for so many people, myself included. The fact is you’re never going to be well-off unless this one rule is harnessed and mastered. Your net worth is only going to go down if you are spending more each month than is coming in. That way lies debt, stress, bankruptcy and misery.

Conversely, if you are putting money away each month, no matter how little, you are getting richer. Every month you are becoming less dependent on other people for your financial security, and taking a little bit more control. You’re also bucking the system, which expects you to be in debt and actually lauds it as being a wise life-choice. It isn’t…

I’ve covered in detail in Session 3 and Session 4 about how to budget, and how to get out of debt if you’re in it already. Go and listen to those sessions and determine that from now on you will spend less than you earn. You can thank me later!

Golden Rule #2 – Pay yourself first

I mention this in my How to Budget instructions back in Session 3. The rule is a direct quote from David Bach’s excellent book The Automatic Millionaire [Affiliate Link], which I think you can only get in Kindle format these days, at least in the UK.

We have all said to ourselves: “We’ll save whatever is left at the end of the month.” But let’s face it, that never works. Far better to save some money or pay off debt first, and then budget what is left.

Practically, for me at least, this means setting up standing orders from my current account to my savings accounts which trigger as soon as I have been paid. All the people I come across who are succeeding financially apply this rule religiously.

I spoke to someone only this week who told me they are overpaying their mortgage by £1,000 per month, a total mortgage payment of £1,900 per month, and they make that voluntary overpayment the same day they get paid. In their minds, they don’t even have that money to spend on themselves. They have no other debt and an emergency fund put aside, but they’re not content with that.

This couple will be mortgage free in just under five more years, and then they’ll be aged about 43. Imagine what they’ll do with that £1,900 per month then. I calculate that if they enjoy a few hundred of that, and put the rest away, then increase it a little every time they get a pay rise, they’ll be sitting on a fund of somewhere in the region of £750,000, after inflation in another 20 years’ time. Not too shabby, and it all comes from paying themselves first.

Golden Rule #3 – Cash is not an investment

Regular listeners will know that I say this pretty much every week. As a general rule, cash is a place to hold money you will need in the next 2-3 years, not for the long term. This is more true right now than it  has ever been. Interest rates are at record lows and are currently in their fifth year of being so low. Markets reckon that they could stay this low for another 7 years yet.

Inflation, in turn, remains stubbornly high at about 2.9% currently. So if you’re getting 1.5% in the bank after tax and inflation is at 2.9%, you’re losing 1.4% of your money every year. Which is a bit crap. We call this losing money safely, it’s madness.

In these low-interest rate times, you should keep as little money as possible held in cash. As long as you have accessible money in an emergency fund, and any money you might need in the next couple of years (house deposit, wedding, big holiday), the rest should be invested.

By the way, when I say cash, I mean bank and building society accounts, Cash ISAs, plus National Savings & Investments products like Premium Bonds and the like. I don’t actually mean cash under the mattress, but then again…

Golden Rule #4 – If it sounds too good to be true, it probably is

If I had a quid for every time I’ve used this one over the years. It applies to every sphere of life, but especially so in the world of personal finance. Despite the best efforts of the regulator, the Financial Conduct Authority, there are still a multitude of scams, and dodgy promises being made.

Most people are smart enough not to fall for the email from the deposed Nigerian prince who wants your help to shift his fortune out of the country to the UK and is prepared to offer you four million British Pounds Sterling if you help him. You’ll just need to send him your bank details and possibly a high fee for the bank transfer that never happens. But many financial promises are more subtle than that.

Anything that offers you high return for low or zero risk, for example – be wary.  Always compare any promises with what you know to be true and if it sounds far-fetched, then run away. For example, if you know you can get 1.5% in the bank for zero risk, or thereabouts, and someone offers you 10% annual return for zero risk, this rule should be ringing in your ears. If someone can get this return, then everyone can, and everyone would be.

Read everything any financial adviser gives you about a particular investment. I don’t care if it really dull, this is your money your signing over. If you don’t want to read it, get a friend or family member who is ‘that way inclined’ to read it for you. Any adviser worth his salt will let you take as much time as you need to make a decision, and not rush you into signing something. Take all the time you need and measure any promise you hear against this rule.

Golden Rule #5 – If an investment is tipped in the national press, it’s probably too late to buy it

I’ll put a link in the shownotes to a graphic produced by Seven Investment Management, which brilliantly illustrates both this point and the next. It shows a mosaic of different coloured squares in a grid. Each column of the grid is a year. The coloured square at the top of each column shows the best performing asset class that year, and the bottom square shows the worst performing asset.

The point of the graphic is that there is no pattern. The asset class at the top of one column may be near the bottom of the next. Or something may perform poorly for three years running, and then have a fantastic year after that.

Popular press often write about what is performing well or poorly at any given time. They may even make some forecasts as to how a particular asset class may do in the future. But they can really only write knowledgeably about what is happening now.

If you’re looking at the graphic you can see that back in 1999, the best performing asset class was Private Equity which returned an incredible 171.8% that year. Not bad – nearly trebled your money in one year. I can imagine the Sunday paper finance sections writing about Private Equity and how it has done. They would include all the warnings about how risky it is, but so many people would see that incredible growth figure and think I’ll have a bit of that!

Then in 2000, it does ?30.1% Drat, you’ve lost nearly a third of your money. In 2001 it loses another 20.5% – Double Drat. That’s half your dosh gone in two years. Then in 2002 it loses another 30.2% – Triple Drat! You have lost more than three quarters of your money in three years. Bet you wish you’d never read that article about private equity!

The moral here is that by the time something has been written about in the popular press is is quite likely too late to get the most of it. Heed the words of the greatest investor of all time, Warren Buffett, who said:

Be greedy when others are fearful, and fearful when others are greedy.

If Mr Buffett had read the article about private equity, he’d probably have sold his entire holding!

Golden Rule #6 – No-one can time the market

Following on from rule number 5 is the truth that no-one, absolutely no-one, can time the market. In other words, no-one knows when a particular asset is going to perform well or poorly. If they could, they would be infinitely wealthy. It would be like having the ability to predict the lottery numbers each week.

Taking the private equity example again, in the very next year, 2003, it went up by 25.2%, then in 2004 up by 15.1% and in 2005 up by 39.4%, and in 2006 up by 13.5%. What a great run! The perfect scenario would be to buy into private equity at the end of 2002 just before that run, and then sell out at the end of 2007, because in 2008 it dropped again by 64.3%. But who could have known that the end of 2002 was the best time to buy into private equity? No-one on the planet, that’s who.

Anything that purports to tell you when, why or how there is going to be a stock market boom, or bust, is flying in the dark just like the rest of us. Sure, some people may have clever modelling systems and years of experience. Listen to these people, but don’t pin all your hopes on them. The ones who really know what they are doing know that the best way to make money over the long term is slowly and steadily, which takes me to the next rule…

Golden Rule #7 – Don’t put all your eggs in one basket

This is Grandma’s approach to life and it works, particularly when it comes to investing. It can be applied in many different ways when it comes to personal finance:

• Asset Allocation – spread your money around different types of asset
• Use multiple tax wrappers – don’t just pay into ISAs, consider Pensions and others
• Use multiple providers for different products

The point is simply that if the handle breaks on any one basket, not all your eggs will smash because you’ll have other baskets with stronger handles. Likewise if you had invested all your money in private equity at the end of 1999 you’d be nursing your losses a year later. But if you only had a small amount of your money in there, and the rest spread across all the other asset classes in the mosaic, you would have been better protected. You should have baskets of different sizes too, and which baskets are which size will be influenced by your risk tolerance and capacity for loss.

Golden Rule #8 – Never invest in something you don’t understand

I get nervous when I see a blank face across my desk and my client says something like: “Just do what you think is best, Pete”. The reason I get nervous is because I know that if my client understands the proposed financial solution I am recommending, they will worry about it less, subconsciously. If they understand it, their brain will file it away as being OK, and when we review things in a year’s time, we can reinforce that feeling of happiness that things are in hand. If I get a blank look and the comment above, I haven’t done my job properly, and I need to find a way to explain what I am proposing to the client more clearly for them.

We all have different ways of thinking and different levels of ability to understand financial matters. Too many people just consider themselves “not that way inclined”, and give up without really trying to understand things properly. These are the same people that go to the pub a few days later and get into a conversation with some would-be financial genius who tells them they’ve done completely the wrong thing and should sue their adviser immediately.

You must do your best to understand what your adviser is proposing to you. For everyone listening to this, you are not likely to need complex offshore tax planning using bespoke trusts, Cypriot QROPS and other such complexities. Leave that for the mega-rich or the terminally gullible. For the vast majority of people financial planning will be dead easy:

Spend less than you earn, put the rest away in pensions and ISAs, invest it wisely

Any adviser worth his salt should be able to help you understand what he is suggesting you do. If you cannot understand it, bring a trusted friend or family member along to a meeting with the adviser and see if they can get their heads around it. If they can’t you need to seriously question whether this adviser is the right one for you.

This podcast, website and videos exist to help explain financial concepts in ordinary language so that you can more readily understand these things when you see an adviser. I hope they help! (If they do, leave me a review to that effect on iTunes!)

Golden Rule #9 – Harness the power of compounding

Compounding is one of those immutable laws that is so powerful, and yet which is sidelined in so many people’s financial plan. As I’ve mentioned in previous sessions, compounding is the process of adding money onto money over time, so that you get a snowball effect, with your money getting bigger and bigger, more and more quickly over time.

In practice this means a couple of things, specifically:

• Start saving as early as you can
• Keep increasing the amount you save over time, if you can
• Use both capital and income to grow your money

This last one needs some detail. If you hold an investment which produces an income, you have two choices as to what to do with that income: you can either take it and spend it, or re-invest it, buying more of the investment with it. Income is money ‘thrown off' or produced by an investment. So a holding of shares may produce a dividend, which is paid in cash into your bank account. This means that the only way the investment can grow is if the capital value of the shares increases. If you reinvest the income though, and buy more shares each time you get a dividend payment, then your investment will grow this way too. You now hold more shares, so when the price does go up, you have more shares for that rise to apply to.

You now have two strings to your bow, and are really harnessing the power of compounding. You are putting the income your investments make to use by re-investing them, and the snowball gets a little bigger.

For what it’s worth, this is why I don’t really like Gold as an investment, because it produces nothing, no interest, no dividends, nothing. The value of your investment is entirely dependent on the whims of the market, you have just one string to that bow instead of two.

Golden Rule #10 – Money is a means to an end, never an end in itself

I’ve said it before, but if someone comes into my office and asks me to make them as much money as possible, I will not work with them. Everyone wants to be better off, sure, but I only enjoy working with people who have a purpose in mind for the riches they aspire to. So for them, it’s not about being rich per se, it’s about being able to travel, or to retire early, or to give more to charity.

Money then is a means to an end. What that end is, is entirely up to you. It can be a noble cause, or pretty ordinary, but you must have something to aim at.

To my mind, money is only good for three things: To invest for your future, to enjoy by spending and to give away. Money is not for hoarding and counting, like Ebenezer Scrooge, but for using in whichever way you see fit.

Summary

So those are my ten golden rules. I could probably come up with a few more, but Seventeen Golden Rules doesn’t really chime does it?! If you follow these rules throughout your financial life you’ll be pretty set, though I say it myself. There’s nothing particularly profound here, just common sense, which is the best way to approach all your financial planning dealings, with your common sense firmly engaged.

Do you have any financial golden rules that you live by? Let me know in the comments.

Outro

That's it for this session of the MM podcast, I hope it was helpful. Do you have any questions or comments? If so, please leave them in the comments section below.

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I hope you enjoyed this session. Next time we'll be talking about how to organise your finances like the super-rich! If you have any questions about this, go to meaningfulmoney.tv/feedback and leave a voicemail

Thanks for listening – I'll talk to you next time