Spend Less Than You Earn: Budgeting is simple: Income goes on this side of your household balance sheet, expenditures on that side and make sure the latter is lower than the former. It’s that easy!
I have zero tolerance for the spending scolds who tell you never buy a boat, don’t get a new car (especially a sports car), and avoid buying lattes. This lazy, ignorant and poor advice given by charlatans and frauds who do not understand math or finance. If they did, they would add the magic phrase: “…if you cannot afford it.” But if you can, then spend your money however you like but preferably thoughtfully. People often skip purchases they can afford out of misplaced guilt.
Leverage Kills: Using borrowed money for nearly anything is the negative manifestation of the three prior rules. Yes, get a mortgage to buy a house you can afford. But never use borrowed money to buy speculative assets that are subject to further capital calls. (Archegos Capital Management was running about 5-to-1 leverage, then blew up quite spectacularly, losing $20 billion and wiping out founder Bill Hwang.)
Understand Your Role: The markets are populated by all kinds. There are traders and investors, hedgers and speculators, and everyone has different risk tolerances, time horizons and financial goals. Do not assume what any of America’s 800 billionaires have to say about investing is especially relevant for your needs. Their goals are likely different than yours.
Be Aware of Your Limitations: What gets so many investors into trouble “is not what we don't know, it's what we know for sure that just ain’t so.” (For example, that above quote, often ascribed to Mark Twain, is more likely unknown.) Understanding the limitations of your cognitive errors and belief systems is just the start. It’s also important to know what inadequacies you have financially, emotionally and behaviorally. Operating outside of your own capabilities is a good way to run into trouble. (The lesson taught in high-performance driving schools is the importance of operating within the capabilities of both the vehicle and the driver.)
Own It: You are responsible for own financial well-being, not the Federal Reserve, the government or whichever huckster is yelling the loudest at the moment. You alone accept responsibility for your investments and spending. The sooner you take ownership of your financial circumstances, the better off you will be.
Invest In Yourself: This is the most important investment you can make. Educate yourself, develop an expertise and add to your professional skill stack. And invest in your future by making sure you fully fund your retirement accounts every year. Make those long-term investment needs before spending on short-term wants (that’s as much of a scold as I can muster).
After making my list, I asked Twitter folks for their favorites. The result was hundreds of suggestions. Consider them an ala carte menu showing both breadth and depth.
My final admonition is the most important rule: “Behave!” As noted throughout, ill-advised decision making and poor behavior are the biggest reasons why many fail to meet their financial goals. All of the above either directly or indirectly refers to behavioral issues dressed up in the lexicon of finance.
Go make a list of rules, then follow it. Your future self will thank you.
Barry Ritholtz is a Bloomberg Opinion columnist. He founded Ritholtz Wealth Management and was chief executive and director of equity research at FusionIQ, a quantitative research firm. He is the author of Bailout Nation.