In my experience, the best advice is most often the simplest. I like to keep every aspect of my existence short and sweet, while liberally applying the KISS (Keep it Simple Stupid) philosophy. I maintain an air of simplicity in everything from my parenting prowess to my anal-retentive financial management. However, financial management is also my middle name -not really-- and it is that area where KISS serves me best, because it helped me craft eight simple rules to live by, that let me live with my head outside of a spreadsheet.
Rule #1: Never buy a house that costs more than 2.5 years' worth of my income.
I believe in living beneath my means. It was a firmly ingrained ideal that my grandparents made sure took root. That belief served me well when my husband and I bought our first house in 2004, only to watch the real estate market crash and burn shortly thereafter.
Thankfully, I had done my homework. We bought in Texas -which was largely unaffected by the crash--, and we were able to weather the storm of national financial crisis, coming out ahead. Even though the bank told my husband and me that we could "afford" a $220,000 home, we opted for a modest, $128,000 abode. This kept our maintenance costs low, minimized the losses we did sustain in the market and keeps us on the straight and narrow when it comes to paying off our four bedroom liability sooner than later.
Rule #2: Set aside 10 percent of our income to retirement.
I took this one a step further and drafted a budget that works backwards, so that my spouse and I survive on 80 percent of our income, saving and investing 20 percent directly off the top. I max out our Roth IRA and then move on to our traditional IRA (that is $10,000 a year, with over 30 years left until we retire). I automated our savings each month, so we do not even see the money on payday -it goes straight to our investment accounts. This has kept our savings growing and expanding on a regular basis, putting us miles ahead of some of our friends who don't see saving as "trendy".
Rule #3: The percentage of bonds in my portfolio equal my age.
Bonds might not have a momentous rate of return, but they are not something to be overlooked when it comes to long-term benefits. Keeping 32 percent (I'm 32-years-old) in bonds keeps my portfolio aggressively growing now, and slowing growth in favor of reliability as I reach my golden years.
Rule #4: Make sure I do not outlive my money.
My mother outlived her retirement funds and I do not intend to copy her mistake. I have allocated my retirement funds (and my spouse's) so that we do not withdraw more than four percent per year from our retirement accounts. I supplemented our retirement accounts with recurring streams of income by investing and building a portfolio of franchises, holding an ownership interest (stake) in each. I started small and grow our LLC portfolio each year. At my current rate of growth, I may not even need to touch our retirement funds when the time comes.
Rule #5: Get a 10 percent return on my investments.
In a volatile stock market, this has been tricky. However, as I mentioned, I invest in franchises, which has kept our 10 percent return closer to 16 percent, year over year. I throw excess funds into mutual fund accounts and we grow our money steadily this way. As the stock market recovers, I will move some (not much) of that money into diversified investments.
Rule #6: Have an emergency fund equal to six months of salary.
I did not always do this, but I do now. It takes a while to build up this much cash in a liquid account, but I make sure that is the first place my savings dollars go until I reach my goal, and I prioritize replenishing that account just as quickly when an emergency strikes, depleting it.
Rule #7: Avoid credit card debt like the plague.
This is another life lesson I can chalk up to having learned "the hard way". However, I can admit that I learned a lot from my sins of the past. I currently carry three credit cards -of the cash back variety--, which I pay off every two weeks, so that I do not carry a balance, meaning I pay $0 interest. I also refrain from financing big-ticket items like appliances or cars; I prefer to pay for these in cash.
Rule #8: Have five times my gross salary in life insurance.
I carry enough life insurance to allow my family to bury me, and be left with an inheritance, separate from my estate. Although, I believe whole life insurance is an utter rip-off, term life insurance is a "must have" on my list.
What are your financial "must do" rules?
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