15 Personal Finance Rules You Should Know by Heart

On any given street, some households are likely to be struggling as they live paycheck to paycheck, while others are comfortable, with ample savings and investments. If you want to be the savviest person on your block, financially speaking, and be able to sleep at night knowing that your financial life is in order, there are some key rules to know and follow.

Here, then, are 15 vital personal financial rules to learn and act on. There's a good chance you're on top of some of them -- but see which ones you could do better on, or which ones you've been ignoring entirely.

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1. Get and stay out of debt

In general, it's good to be carrying minimal debt. Having a mortgage is often unavoidable, and for most people that's not a big problem as interest rates are currently low. But any high-interest rate debt, such as that from credit cards, should be paid off as soon as possible. Many cards are charging cardholders annual interest rates of 25% or more, and on $20,000 of debt, a 25% interest rate can cost you around $5,000 each year!

2. Have an emergency fund

Here's an alarming statistic: Fully 44% of Americans didn't have ready funds to cover an unexpected $400 expense and would have to resort to borrowing money or selling something, according to a Federal Reserve report last year. We all need to have a plan for how we'll get by if we lose our job or face a costly health crisis or suddenly have to pay $1,500 to fix our car. You don't want to have to drain a retirement account for that or, worse, charge it all on a credit card, so stock an emergency fund with three to nine months' worth of living expenses.

3. Get life insurance if you need it

If anyone is depending on you financially -- and this can be not only your kids but also a spouse or even your parents or siblings -- you need life insurance. It's as simple as that. Term policies are generally better deals than whole life ones, as they only have you paying for coverage while you need it. Meanwhile, if you're paying for life insurance and no one depends on your income any more -- your kids are grown and your spouse will be fine financially without you -- consider ending your policy in order to save money.

4. Shop for cheaper insurance regularly

Be sure you have all the insurance coverage you need -- home insurance, car insurance, life insurance, health insurance, renters insurance, and perhaps even umbrella insurance. (You can often get a discount by having several different policies with the same insurer.) But once you buy your policies, don't stop there. Aim to spend an hour or so each year making phone calls to insurers, to shop around for better rates. Each insurer uses different formulas to determine their rates, and each probably will offer you a different price for the same coverage. Different insurers might offer the best deal in different years, also. Keep an insurer's reputation in mind, too. Don't switch to one that's not rated highly.

5. Have a budget

If you have no problem spending money on anything you want while also saving and investing sufficient sums to meet your financial goals (such as retirement, a home down payment, etc.), you may not need a budget. But most folks will profit by taking the time to track exactly how they're spending their money and coming up with an improved, money-saving spending plan.

Devote a few months to tracking all your spending, to see where your money goes. Keep a notebook on you to record cash payments, and review bank statements and credit card statements for other expenses. List all your goals (such as, say, saving and investing $800 per month) and prioritize all your spending. Categories such as housing, food, utilities, and savings should come before travel and other discretionary spending. Draft a budget and stick to it.

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6. Save money wherever you can

For best results throughout your financial life, live below your means -- such as by using coupons, comparing prices before buying, bypassing some luxuries, and brown-bagging some lunches. The more you can save, the better off you'll be -- now and in retirement. There are lots of ways to save small sums such as $50 per week -- which will net you a solid $2,600 per year. However much you're saving, aim to increase it each year. You might hike the percentage of your pay that you contribute to your 401(k) account annually, and another strategy is to plow any raise you receive right into your savings.

7. Use tax-advantaged retirement accounts

One great way to save more is to take advantage of tax-advantaged retirement accounts such as traditional and Roth IRAs and 401(k)s. The traditional forms of both will give you up-front tax breaks by shrinking your taxable income in the year of your contribution -- while the Roth versions accept post-tax contributions and promise tax-free withdrawals if you follow the rules. Most of us can contribute to an IRA -- up to $5,500 annually for 2018 (plus an additional $1,000 for those 50 and older). The contribution limit is much more generous for 401(k)s -- for 2018, it's $18,500 plus $6,000 for those 50 or older. Contribute at least enough to your 401(k) to receive any matching money available from your employer -- that's free money, after all.

8. Invest aggressively

Few Americans have been saving sufficient sums for retirement throughout their working lives, so most have some catching up to do. The best way to do that is to start investing aggressively, socking away as much as you can. (Remember that your earliest invested dollars are the most powerful, as they have the most time to grow for you.) To appreciate this, check out how a single $1,000 investment might grow over various periods in the table below:

Calculations by author.

Now let's look at some bigger numbers. Here's how much you might amass over several time periods if your money grows by an annual average of 8%:

Calculations by author.

9. Invest effectively (index funds enough)

Next, be sure you're investing as effectively as you can. If you're socking away huge sums but keeping them all in money market-like investments, those sums won't grow very quickly. Don't settle for default settings. 401(k) plans typically feature default investment choices, and they tend to be conservative ones that won't serve you well if you're young and may not be great if you're older, either. Be sure to find out what kinds of fees you're being charged in your 401(k), too, and give extra consideration to choices with low fees. You can compare your employer's 401(k) with other companies' at BrightScope.com. If your fees seem steep, let your company know.

Sticking long-term money in the stock market should give you a good chance of solid growth. Doing so via index funds is a great way to go, as long as they're low-fee ones focused on the broad market, such as the S&P 500 or the total U.S. or world stock market. They will likely outperform most managed stock mutual funds. The SPDR S&P 500 ETF (SPY 1.31%) is a good candidate for your dollars. It will distribute your money across the 500 companies in the S&P 500, which make up about 80% of the U.S. market. There are bond and real estate-focused index funds as well.

10. Pay attention to fees

You're charged fees all over your financial life -- in your investment accounts, bank accounts, mutual funds, retirement accounts, and so on. Spend a little time taking inventory of them and see whether you might switch to some lower-cost options. If you can pay 1 percentage point less on $100,000, you'll save $1,000 -- per year. Consider, for example, that a typical managed stock mutual fund might have an expense ratio (annual fee) of, say, 1.1%, while you can be invested in an index fund that tracks the S&P 500 for 0.1% -- or less. Here's how annual investments of $10,000 would grow, if they averaged returns of 10% annually, with those two fees subtracted:

Calculations by author.

11. Maintain a solid credit score

Having a good credit score is important throughout much of your life, as it can get you lower mortgage interest rates, saving you tens of thousands of dollars and can also get you approved for the best credit cards -- ones with great terms, great benefits, and more. To keep your credit score high, pay off your bills in full and on time, and don't max out your credit limits on your cards.

To get a good credit score, you need a solid credit history and credit report. Your credit report offers lots of details on your debts and repayment history, as well as a look at the credit you have, such as through credit cards. You're entitled to a free copy of your credit report annually from each of the three main credit agencies, so visit AnnualCreditReport.com to order yours -- and then check them for errors, fixing any that you find. Your credit report won't include your credit score, but many credit cards these days give you access to your credit score or include it on each statement.

Image source: Getty Images.

12. Teach your kids about money management

Teach your kids about the value of a dollar and of investing. The earlier they start socking money away, the longer it will have to grow. This personal finance rule is very powerful, as it can cascade down generations of your family. It also costs you little to nothing to do, and can result in your kids being financially self-sufficient throughout their lives, not needing support from you in their adulthood.

How should you teach them? Well, talk openly and frequently about how you're managing your money and making financial decisions. You might open a custodial account for them at a local brokerage and then study and invest in some companies together. Our book The Motley Fool Investment Guide for Teens, can also help. Have discussions about companies and how they grow and face challenges. Have the kid(s) choose a few companies that interest them to follow and/or invest in -- possibilities include Activision Blizzard, Apple, Boeing, Chipotle Mexican Grill, Disney, Hasbro, Netflix, Nike, Starbucks, Target, Under Armour, or VF Corp. 

13. Let your retirement accounts grow

It's also very smart to let any money in retirement accounts stay there until retirement, so it can continue to grow. About one in three investors cashed out their 401(k) before reaching age 59 1/2, per data from Fidelity Investments. Withdrawing money early results in a 10% penalty along with taxes on the income -- and since many people cash out their accounts each time they leave a job, they're often doing so at very young ages, losing out on a lot of potential retirement funds. Fidelity noted that the average cash-out for those under age 40 was $14,300. If that money had been left to grow for 25 more years and it averaged annual growth of 8%, it would amount to almost $98,000. That would have been enough to generate more than $300 in monthly income in retirement.

When you change jobs, instead of cashing out a 401(k) account, just roll it over into an IRA. Similarly, don't borrow from your 401(k) plan, either, unless it's an emergency and you really have no better option. That's another way of stealing from your financial future.

14. Make smart Social Security decisions

Don't make any Social Security decisions without reading up on the topic and weighing your options. It's very much in your power to increase your Social Security benefits, if you strategize a little. You can make your checks bigger (or smaller) by starting to collect them earlier or later than your "normal" (in the eyes of the Social Security Administration) retirement age. There are also other income-maximizing strategies to consider, especially if you're married and coordinate with your spouse.

15. Get professional help if you need it

Finally, don't be afraid to seek help getting your financial ducks in a row. Few of us every learn much about money management in our lives, and retirement planning is so critical that it's worth tapping the services of a good professional. Ones designated as fee-only won't be looking to earn commissions from selling you products, and you can seek one at www.napfa.org. Yes, you may pay several hundred dollars or more, but a good pro might save you much more than that.