10 Rules of Wealth They Should Have Taught Us in School

by Barbara Friedberg

I like school as much as the next investor, and there's nothing wrong with learning history, languages, the arts and more.

But for lifelong success and wealth building, there are "10 Rules of Wealth You Should've Learned in School." Schools are woefully inadequate in teaching personal finance principles. And forget about learning money principles from Mom and Dad. Most likely, they've maxed out their credit cards and are living paycheck to paycheck.

If the school systems were smart, they would teach these rules of wealth.

1. Spread Your Money out over Your Entire Life

Franco Modigliani, an American economist, laid out the theory that one's earnings should be viewed in an aggregate that will start small and grow over time during the working life. During the earning years, the citizen must consume, save and invest so that the limited earning years provides lifetime resources to spend.

In simple terms, spread your money out over your entire life, don't avoid investing or spend too much when you are young or there won't be enough left when you are old.

2. Put Part of Every Dollar Earned or Received into Savings

From day one, teach this strategy to your kids as well as practice it yourself; save a percent of every bit of income, regardless of the source. That $1,000 tax refund is not free money to be blown as you see fit, it is your own money that needs to be wisely allocated.

3. Forget About the Joneses (or Kardashians)

The rich don't look it. Turn off the advertisements, forget about the Kardashians and walk past the Louis Vuitton store. More stuff doesn't equal greater happiness; it equals less wealth. Train yourself to spend on what is important to you. Forget about the Jones' new car, if yours is running fine. Create your own self worth from your relationships and accomplishments, not your consumption.

4. There is No Such Thing as "Found Money"

Behavioral finance describes irrational money behaviors. One of the most common is considering money from different sources as having different uses. For example, "Spend dividends and save capital gains," or "Splurge when you receive unexpected money." The truth is that all money is exactly the same regardless of the source.

Your funds should be allocated so that part of every dollar goes towards savings, expenses, and fun regardless of the source. Decide in advance how to meet your current and future financial needs and then use your funds with those decisions in mind.

5. Skip the Lottery, Smoking and Gambling

You are not going to win the lottery, so just forget about it. The odds of winning the Powerball lottery on a single ticket are one in 175 million, according to statistician Ronald L. Wasserstein of the Huffington Post.

Smoking will kill you and costs upwards of $5.50 per pack. Smoke four packs per week and you have blown over $1,100 per year. And gambling, well, the house has the advantage!

Enough said. Invest the money otherwise spent on these wealth-sucking habits, and over time you will definitely have tens of thousands of additional dollars.

6. Know Your Tolerance for Financial Risk

Investing early and often is an excellent way to build wealth. Before you drop all your money in the stock market, however, do some homework. Understand that stock investments are volatile: In one year, you might experience a 20% gain, while in another, you may have a 20% loss. Figure out how much you can stand to lose in a year before investing.

If you can tolerate a bit more risk, allocate a larger amount of your funds into stock investments. If you can't stand volatility in your portfolio, keep a larger percent in bonds and cash investments.

7. Max out Your 401(K)

Sign up with your employer for your workplace retirement account as soon as you start working. Frequently, your employer offers to match a percent of your contribution -- that is free money. The money you invest compounds and grows tax free. Direct those contributions into low-cost U.S. and international stock index funds and diversified bond funds.

8. Max out Your Roth IRA

Even if you invest in your workplace retirement account, contribute as much as you can to a Roth IRA for you and your spouse. Over time, the tax-sheltered compounding of returns can make you rich.

9. Save up Six Months of Living Expenses in an Emergency Fund

Only use this for real emergencies. Keep the funds in a bank savings account. This money is the best protection against financial stress. Many families are just a paycheck away from homelessness. By keeping funds available for emergencies, you are prepared when the car breaks down or you lose your job. Money stress is debilitating. Fight it with an emergency fund!

10. Pay off Your Credit Card in Full Every Month

Debt is like a financial noose around your neck. You cannot build wealth if you are paying 15% interest on your credit card every month. If you have credit card debt, pay if off now. If you don't, do whatever it takes to pay your credit card in full every month.

[Learn how to pay 0% APR on your credit card debt in The 4 Best Credit Cards for Balance Transfers.]

Commit these rules to memory, implement them in your life and you will be much more likely to avoid financial stress and build lifetime wealth.

Barbara Friedberg, MBA, MS, is a portfolio manager, former university finance instructor, and publisher of the Barbara Friedberg Personal Finance website.

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