For sure, they won’t all just stick in your brain. And many will change over time as Uncle Sam reforms our taxes and benefits, and as new and better financial products come on board. Still, having guiding principles at hand can help you manage your money and achieve financial security.
As an economist, here are the top 21 money rules that I live by and teach:
1. Don’t borrow for college. It’s far too risky and expensive. I don’t say this lightly. I’m a college professor. But you can get a fine education without mortgaging your future and potentially dashing your career plans.
It simply involves pursuing scholarships and applying to less expensive, if generally less prestigious, institutions.
2. If your parents are borrowing for your tuition, discuss who will repay. And consider whether they’re blowing your inheritance or sacrificing their welfare by “helping” you attend an unaffordable college.
3. Strive to own your home, not rent — and try to buy in cash. This is particularly the case if you’re a moderate to high earner. Having more of your money packed in your home is a way to shelter it from federal and state asset-income taxation.
4. Mortgages are tax and financial losers. Pay them off ASAP. Think about it: If you have $100,000 that you can invest right now in a bond earning 1.5%, you’d have $1,500 in interest income over the course of a year. But if you had a $100,000 debt at a 3.2% interest that you could pay off right now, you’d save $3,200 over the course of the year in interest payments.
On balance, you’d make $1,700 with no risk by investing in debt repayment rather than investing in the bond.
5. Owning a home can reduce longevity risk. Here’s another reason it’s better to own instead of rent. Let’s say you’re 70 and have found your dream location. Renting for the rest of your life runs the risk of rent hikes without the possibility of your fixed income increasing.
In contrast, if you owned your home, home prices can soar or collapse, but you’ll be insulated. Since you are neither buying nor selling your home, who cares what the housing market does? Your housing consumption is guaranteed through the end of your days.
6. Your perfect home may be far cheaper several time zones away. Or it may be someplace with no state income tax, no state estate tax, and no state inheritance tax.
Yes, things are more complicated. Land values in New Hampshire may be higher in light of the state’s tax advantage. And the school system may be better in Massachusetts. But who knows? You may be childless and happy to live in a tall five-decker with no yard.
7. Choose jobs that everyone but you hates. All else being equal — skills, education and experience — people with unpleasant, nerve-racking, insecure, disturbing or financially risky jobs get paid more than people with the same skills working jobs with none of these drawbacks.
Economists call the extra pay a “compensating differential.” The key to taking advantage of it is to find something that you love and, ideally, others don’t.
8. Don’t worry about career and job hopping. How can you not shop around when there are so many options? Certainly, the fastest path to a raise is getting a credible outside offer.
9. Consider working for yourself. I tell this to my students often. If you start the right business the right way, it will raise your remaining future earnings and provide unmatched job security.
If that sounds too risky, brainstorm ways to turn your hobby and interests into a side hustle.
10. Keep thinking about tomorrow. Are you in the best possible career for the rest of your working days? Should you make a switch? Is your current job in danger? Set a date every few months to do a career review with a spouse, partner or friend.
11. Your living standard is your bottom line. Simulate its potential paths based on alternative investment and spending strategies to see where these strategies can land you.
12. Marriage beats partnering long-term. It may mean somewhat higher net taxes, but it comes with an array of valuable implicit insurance arrangements, which the formality and legality of marriage help enforce.
13. If you do get married, count on getting divorced. It’s as likely as not. Protect yourself and the love of your life with a prenup.
14. All lifestyle decisions — switching careers, moving homes, getting married, having kids, getting divorced — come at a price. Measure these prices in terms of your sustainable living standard.
15. Use retirement-account contributions, conversions and withdrawals to cut your lifetime taxes. And make sure to contribute enough to get your employer’s match!
16. Wait until age 70 to take Social Security retirement benefits. Retirees who wait to claim can get hundreds of dollars more each month than those who take benefits early.
Of course, this isn’t feasible for everyone. But here’s my plea: Before making any moves, figure out the strategy that maximizes your household’s total lifetime benefits.
17. If you don’t formally request your Social Security benefits, you won’t get it. I’ve had many people in their mid-70s ask me when they’ll start getting their checks. That’s when I groan and tell them they need to file for their benefits immediately.
Social Security isn’t in the business of letting us know what it owes us, never mind that we have paid FICA taxes our entire working lives for those benefits.
18. The Social Security Administration’s Program Operations Manual System has thousands of rules, which its staff can get wrong, in part or in full. Talk to multiple offices and do your own research.
19. Retiring early is financial suicide. Yes, there are situations where retiring early makes sense. But very few of us think of early retirement as what it really is: a decision to take the longest and most expensive vacation (that most of us can’t afford).
Putting it this way makes clear that the wonderful benefits — extra time with the grandkids, freedom to pursue hobbies, reduction in stress — all come at a high price: the loss of years, if not decades, of earnings.
20. Most conventional investment advice is, to be nice, of dubious value. It’s predicated on you making four major economic mistakes: Saving the wrong amount when younger, putting your preretirement savings on autopilot, spending the wrong amount when you’re older, and never adjusting to market conditions.
21. If you’re worried about downside risk, play the stock market like a casino. Think of the investment in stocks as cash you take to the casino: Don’t spend a penny of your winnings, if you make any, until you’ve left the building. Or, in other words, don’t put more money into the stock market until your initial bets are safe from losses.
Laurence J. Kotlikoff is an economics professor and the author of “Money Magic: An Economist’s Secrets to More Money, Less Risk, and a Better Life.” He received his Ph.D. in Economics from Harvard University in 1977. His columns have appeared in The New York Times, WSJ, Bloomberg and The Financial Times. In 2014, The Economist named him one of the world’s 25 most influential economists. Follow him on Twitter @Kotlikoff.
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