Five essential personal finance rules.

Personal finance can be very...well, personal. Everyone has a unique relationship with money. What works for one person may not work for the next. However, there are some rules that almost all of us should follow. Here are five rules that I believe work really well.

Rule #1: Have at least one source of income.

This may sound obvious, but everyone should have at least one source of income. You can't really start your personal finance journey without income. For most of us, this comes from our job. Employment income for many is the main, or only source of funds. I would encourage you to create a second or even third source of income. This can be passive income, such as dividends and interest from investments in stocks and bonds, or rent from real estate ownership. It could also be active income, from a second job (aka side hustle). In my experience, if you have a passion or expertise in something, it can likely be monetized.

Rule # 2: Minimize your taxes.

There are steps you can take to minimize your taxes. This depends on your jurisdiction, but in Canada contributing to your RRSP (401K in the US), income splitting with a lower earning spouse (or even with your children) etc. are all going to reduce your overall tax bill. Consult with an accountant, a good one can be worth their weight in gold!

Rule #3: Spend less than you earn.

Living within your means is the cardinal rule of personal finance. There are many 'rules' for how much of your income you should save, and many personal finance experts will advise saving between 10%-20% of your income. This is a deeply personal choice and also depends on your circumstances, such as how many financial dependents you have etc. However, it is crucial for everyone to save some money. As Warren Buffett said "do not save what is left after spending, but spend what is left after saving". For those who are fortunate enough to have a job that come with a regular annual bonus, a great saving rule is to "spend your salary, bank your bonus". As your career progresses and your earning power increases, be careful not to grow your expenses faster than your income. It's very tempting, and easy, to inflate your lifestyle. Downsizing your lifestyle can be incredibly difficult, so don't inflate it excessively to begin with.

Rule #4: Avoid high-interest debt.

Everyone has a unique relationship with debt. Some debt, like taking out a mortgage to buy a primary residence, is almost unavoidable. Other borrowing, like credit card debt and other high-interest loans, should be avoided like the plague. It really doesn't make sense to owe money with an interest rate over 20% if you have any form of savings at all. It would make sense to wipe out any credit card or other high-interest debt that you are carrying, before you build up savings. Use of financial leverage (i.e. borrowing to invest) can make sense for some, particularly if you can borrow at a low rate and invest at a high rate. Again, this is a deeply personal decision, but depending on your personal balance sheet, adding some debt to your capital structure can make sense in certain cases.

Rule #5: Invest what you save.

If you own your home, that is likely your single largest investment. However, your investments don't have to stop there. Beyond keeping 3-6 months of household expenses in liquid cash for emergencies, you should be investing all of your excess capital. Start with the funds in your tax-advantaged registered account (RRSP and TFSA in Canada, 401K and IRA in the US). A low cost, passive index fund (either stocks only, or stocks plus bonds) can be a good choice for many, especially those saving for retirement and with a long term investment horizon. If you have savings beyond your registered accounts, invest those as well. Be sure to periodically re-invest your interest and dividend payments, and also to periodically rebalance your portfolio to the desired asset mix.

There are entire industries built around personal finance. However, it does not need to be complicated. Use common sense, figure out what works for you and what you can maintain.

Good luck, and happy saving (and investing).

The material contained herein is provided for information purposes only and should not be relied upon as a basis for investment decisions. It is not intended as investment, financial, legal, accounting, tax or other advice and it does not constitute, either explicitly or implicitly, any provision of services or products by ASMC. All statements made regarding companies or securities are strictly beliefs and points of view held by ASMC and are not endorsements or recommendations by ASMC to buy, sell or hold any security. Clients of ASMC may maintain positions in the securities discussed in this article. While every measure has been taken to ensure the accuracy of the information, ASMC or its affiliates do not guarantee the accuracy or completeness of this material. Any information or materials which are provided or maintained by a third party are provided “as is”. AS Management Corp. will not be responsible in any manner for direct, indirect, or special damages, howsoever caused, arising out of the use of this information or material.

? AS Management Corp. 2019