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10 Rules to Guide You Through a Lifetime of Financial Decisions

Money. There's no denying that it's a big part of our lives. It's the means to all of those important ends: security, opportunity, philanthropy, legacy, wish-fulfillment. And because of all that, it's easy to feel like you'll never know everything you need to in order to manage it smartly.

You can certainly get into the weeds of financial planning and investing -- and, by all means, please do if that's something you enjoy. However, successfully building wealth over time need not be an all-consuming, overwhelming task. In fact, it does not require much more than simply following a set of basic guidelines -- the money "must knows" below -- being consistent about it, and keeping at it in good times and bad.

1. Pay yourself first
Financial independence is impossible unless you learn to make your financial well-being a priority. Pretend that you are a bill that you're required to pay, just like your electricity bill, mortgage, or other necessity to keep life running. Even if you can only afford to pay yourself $20 a paycheck, do it. Down the road you'll be able to afford much more, and you'll gladly do so if paying yourself first is already a habit.

2. Invest your savings smartly
First things first, you need an emergency fund -- three to six months of living expenses -- and it needs to be in cash so that it's readily accessible should the unexpected (job loss, car trouble, health issues) occur.

After that, here is how to prioritize where you put your investing dollars:

  1. Contribute to your company 401(k), at least until you max out the company match.
  2. Open a Roth IRA.
  3. And if you still have investing dollars to allocate, return to your 401(k) (if the investment options are decent and fees are low) or open a taxable discount brokerage account.

3. Build a portfolio you can stick to no matter what the market is doing
Smart asset-allocation within your portfolio is what enables you to weather the stock market's ups and downs over the long haul.

What percentage of your money should be in stocks and what percentage should be in bonds? One good rule of thumb is to subtract your age from 110 to come up with your stock allocation and then put the remainder in bonds. For someone who is 40, that means allocating 70% in stocks and 30% in bonds. That's a good place to start, but you should adjust accordingly depending on your individual tolerance for volatility.

Any money that you need to use in the next five years does not belong in the stock market. It should be in CDs, money market funds, or just plain cash in the bank. Don't put that money at risk.

If you are not interested in managing a portfolio of individual stocks, outsource this job. But don't overpay for the service. Choose a target date fund (which is based on the year you plan to retire). Allocation is adjusted accordingly as the years go by based on the appropriate mix of investments for the particular retirement date. Index funds are another option. The key is to avoid high-fee funds with loads. Remember, every dollar you pay in fees is a dollar that isn't compounding and adding to your returns.

4. Look for conflicts of interest before you hire any financial services
Before acting on any advice ask your financial professional these two questions:

  1. How do they get paid for the advice provided? (This is why we prefer fee-only financial advisors, versus those paid by commission.)
  2. Are they personally invested in whatever they've suggested?

You should be comfortable with the answers to those questions, and all aspects of the transactions should be explained in clear terms.

5. Buy term insurance
If you have a family -- especially small children -- buy enough insurance so that in the event of your demise and loss of income, your estate can pay off your debts and cover your children's expenses through their college years. In most cases, term insurance will best serve your needs.

6. Don't buy too much house
The sprawling McMansion that your mortgage broker said was affordable can quickly turn into a McPrison when all of your money is locked up in it. There are lots of home affordability guidelines out there. Start with this one: Don't spend more than 300% of your gross household income. Another is to pay no more than 150 to 200 times the monthly rent of a comparable property. All of that said, don't buy a home unless you plan to spend at least seven years in that area.

7. Protect your loved ones from financial and emotional hardship during the worst of times
In times of sickness, incapacity or death, three important documents will help your loved ones deal with financial and medical issues: a will, a durable power of attorney, and a living will. If you're an adult with substantial savings, you need to have a professional draft these three documents. These are really important, so we don't recommend using online forms.

8. Check your beneficiary designations
Make sure you have up-to-date beneficiaries listed on all of your accounts -- bank, retirement, insurance, and any assets that require you to provide a beneficiary. Too many estates go through complicated, drawn-out legal battles because of missing or out-of-date beneficiary information. Make a review of your beneficiaries standard practice after any major life event, including marriage, death, divorce, and parenthood.

9. Do the right thing with your old 401(k)
If you switch jobs, avoid the temptation, taxes, and penalties associated with cashing in that account. Instead, roll it over into an IRA. Doing so will give you complete control of how to invest that money going forward.

10. Create a diversified portfolio that reflects your values
As you're building your portfolio, think about how much you want it to reflect what you believe in -- your values, interests, and overall thoughts about the world. Of course, not all admirable companies make great investments.

On the practical side:

  • A basic portfolio should contain somewhere around 15 to 25 positions.
  • Buy in thirds. If a full position is 6% of your portfolio, buying in thirds means buying 2% at a time. That way you are never buying at the top or the bottom, but rather dollar-cost averaging into your investment.
  • Be sure to keep your trading costs below 2%.
  • Consider 10% as the maximum position size when buying a stock. And no more than 30% of your portfolio should be in a single sector.

No matter what stage of life you're in right now, what financial condition you're in, what mistakes you've made, or what opportunities you've missed, it's never too late to take control of your financial future.

Dayana Yochim likes making lists and likes crossing stuff off of them even more. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Read/Post Comments (5) | Recommend This Article (41)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On April 06, 2014, at 2:26 PM, ralf914 wrote:

    Two out of ten isn't bad right?

  • Report this Comment On April 07, 2014, at 7:35 PM, TMFBoomer wrote:

    This is great advice Dayana!



  • Report this Comment On April 08, 2014, at 9:10 AM, Singular2 wrote:

    What about the "fool" who is bind by a trust that is run by a brother who is executor of the will/trust and decided that my $ should be invested his way. I am 49 and 95% of my retirement money is invested in stocks. i am a low wage earner of less than $30K a year. When asked questions about the financial planner and his fees/commission, I was told don't worry about it. Meanwhile I lost over $40K during the meltdown in 08' but still I am losing over time. When I approach this my brother states if I challenge I can be disinherited. I know he made money off four of us in our family by investing and using the same financial advisor, and therefore using our accunts to see what works and what doesn't... like dummy accts to build his own wealth or add to it. How do i know? I was sent my brothers front page for his retirement/yearly statement. He deposited $100k last Jan 13' to make him a millionaire now. Who does this with a family of three: one in college-Berkley/the other graduated and the next one getting ready. Plus a vacation to Europe with all. I think a brother who has been utilizing our accounts to build his own over the last 6 years now. Of course I asked to see his earnings over the last 6 and he refuses and says in the eyes of a judge what he has done is help me. I went from $129 K to $32K.

    Since this time I have lost 2 siblings for which now the two of us left have hardly anything to invest so he will not listen when I ask for him to take my money out of stocks and put it into a less aggressive market or just place in an IRA or Roth, he thinks I don't know what is going on... I am in a catch 22. I have no say so in my retirement money. Do I have legal recourse? Now I want to buy a house and he wan'ts to lend me $ with an APR the same as a bank loan and states I have my "trust" as my default.

    Should I do this? I can't go through a bank since I have debt and can[t pay it off right away and the fact more than half of my money is from odd jobs and cleaning for which I am not ready to pay taxes on until I add more clients.

  • Report this Comment On April 09, 2014, at 9:15 AM, RandyNC wrote:

    @singular2 - perhaps you mistook this for the Ann Landers column page?

  • Report this Comment On April 09, 2014, at 1:01 PM, TMFBomb wrote:

    Great article, Dayana!

    Fool on,


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