12 Rules for Personal Finance – Personal Financial Planning Basics

I am very interested in economics, finance, and investment, and have learned these for a couple of years in my spare time. The main purpose of learning them is to improve my personal financial situation. The other day, I took the CFP (Certified Financial Planner) sample quiz and correctly answered 7 out of 10 questions. Not bad. 

I have summarized the basics of personal financial planning, 12 main points in total. As a tribute to Jordan Peterson’s 12 Rules for Life, I call it 12 rules for Personal Finance. 

1. Set your goals. It could be to secure a financial future, to retire early, or even to achieve financial freedom.
2. Budget. Spend less and save more.
3. Increase your income. Invest in yourselves, e.g. get continuing education or professional certificates for career advancement. 
4. Get out of Debt as soon as possible. Especially the high-interest debt, such as credit card debt.
5. Set up an emergency fund which can last 6 months without employment.
6. Boost your credit score. For example, have a credit card but always pay off the balance. The credit score is critical when you take a loan, e.g. mortgage.
7. Use banking wisely. Have a basic checking account to pay bills. Have a saving account or use CD (Certificate of Deposit) to save money. Have a credit card but don’t borrow money from it.
8. Tax consideration. Always consider taxing when making money decisions.

  • Have an HSA (Health Saving Account) if possible. It has triple tax benefit, meaning there is no tax on contribution, spending, and investment.
  • 529 College Saving Plan. Although the contribution is not tax deductible, the investment is, and it will not be taxed if the money is used to pay education.

Have enough insurance.

  • Property and Casualty Insurance to cover the properties you own, like auto insurance, homeowner insurance, renter’s insurance.
  • Liability Insurance to cover the damage you accidentally cause to other people or their belongings. Usually, auto insurance, homeowner insurance, and renter’s insurance already include liability coverages, but Umbrella insurance can provide additional coverage beyond the limits of these insurances.
  • Life insurance to provide support for your family in case of your accidental death.
  • Disability Insurance to provide income in case you become disable and cannot work.
  • Health Insurance to cover medical expenses.
  • Long-term care insurance to cover long-term care expense beyond the coverage of health insurance.

10. Plan for Retirement

  • Social Security. Social security is going broke unless it is dramatically reformed. So don’t depend on it.
  • Pension. Just like social security, pension plans are not very dependable either. So you’d better have your own retirement fund.
  • 401, 403 and IRA. If your employers offer 401(k) or 403(b) plans, use it, otherwise set up an IRA account. These retirement accounts have tax benefits, so try to max them out to take full advantage of them. If your employer has a contribution match, don’t waste it.
  • Annuity. An annuity is an alternative way to plan retirement. You put a lump sum in now and you will get a steady income stream after a certain age.

11. Learn investment to even better enhance your financial situation, and achieve financial freedom.

  • Stock. Buy individual stocks only if you have the time, knowledge, and intelligence to control your emotions.
  • Bond. Just like stocks, bonds could have different risks and different returns.
  • Mutual fund and ETF (Exchange Traded Fund). Buying mutual fund or ETF, you essentially trust your money to be managed by others. There are actively managed funds and passive index funds. Mutual funds could invest in stocks, bonds, and short-term debt.
  • Stock Index Fund. The stock index fund, e.g S&P 500 index fund is the most recommended investment if you have a long-term investment horizon and won’t panic if the market crashes. The compounded yearly return of the S&P 500 index is 10% in the past 50 years, and 8% in the past 10 years.
  • Other Investments. For example,
    • Derivatives, e.g. Options.
    • Commodity and futures contract
    • Real estate.
    • Foreign currency.
    • Cryptocurrency.
    • Private equity.
    • Hedge fund.
  • Collectibles like wine, art, stamps or vintage cars.
  • Use Modern Portfolio Theory to calculate and maintain risk while maximizing return.

12. Set Will and Trust to ease the process of passing your asset to the next generation.

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