The Young Professionals' 10 Rules For Financial Freedom

1. Live Below Your Means: This means tracking your after-tax income, your expenses, and making sure that you are spending less than you take home. Financial success can be that simple. You should have a good understanding of where your money flows, both in and out.
2. Create A Realistic Plan And Stick To It: The enemy of an effective plan is the hope and pursuit of a perfect one. Create a realistic and workable plan that you can and will stick to. Don’t overthink it or make it too complicated. Keep it simple... Set a goal, determine your targeted savings rate, create an investment plan, and focus on your day job. If you desire professional assistance, hire a Financial Planner.
3. Pay Down Your Debt (Guaranteed Return On Your Investment): When you pay down debt you are getting a guaranteed rate of return on your money equal to the interest rate that you owe on the debt being paid down. There are a few ways that you can prioritize debts when you have multiple. Some people like to pay off the smallest total amount first, regardless of the interest rate, to create a snowball effect from the good feeling and keep them excited about paying down more debts. Others like to pay down the highest interest rate debts first to minimize the amount of interest they have to pay over the long run. A third possible strategy is to pay down a portion of each debt consistently. Regardless of the strategy that you utilize, paying down your debt positively contributes to your net worth and can reduce your financial stress.
4. Build An Emergency Savings Fund: Young investors with steady jobs can get away with having 3-6 months of living expenses saved, but the goal should really be to accumulate 6-12 months worth of expenses. An emergency fund is important because it gives you something to fall back upon if you lose your job, if you need to repair your car or house, or if you have an unexpected medical bill come up. This can often be the difference between going into debt or remaining solvent when a financial emergency presents itself. If you have dependents, you are nearing retirement, or you are considering the retirement transition, then you should accumulate closer to 12-24 months worth of expenses in your emergency fund. The later you are in your career or the more senior of a position that you hold, the more likely it is that you will stay out of work for a longer period of time and your expenses may perhaps be higher than a saver and investor that is at the beginning of their working career and in a more entry-level position. Emergency funds should be placed in a highly liquid, easy to access, low risk vehicle with guarantee on the capital such as a checking account, money market fund, or a high yield savings account. An Emergency fund is not to be overlooked or discounted. It may seem unnecessary in good times, but in bad times it is your life vest on a sinking boat. If you lose your job or need a surgery, or worse, lose your job and need surgery, would you be financially secure enough to not worry or be stressed about the situation? 
5. Understand Risk And Your Tolerance For It (Asset Allocation): Never take on too much or too little risk. Be realistic with yourself. Self-awareness is important here. Find a healthy balance of stocks and bonds within your portfolio that reflects your tolerance and capacity for taking on risk. Stocks provide growth in your portfolio and are considered the riskier part of your portfolio while bonds provide stability and are considered the safer side of your portfolio. Recognize that it is easy to take on risk when the market environment is good. But it is imperative that you find a risk level that you can stick to in the worst stock market conditions as well as the best. Often, it will feel like you are too light on stocks when the market is rising rapidly and then when the market pulls back, you will often feel naked, cold, and exposed. If you are interested in further understanding the psychology of something as emotionally and financially taxing as a financial depression, check out the book “Diaries of the Depression” to get a first hand look at what a depression can mean for your everyday life. Your age in Bonds minus 10% is a rule of thumb that some investors utilize to determine their stock to bond (equity to fixed income) split…. More ideally though, look at your situation in terms of where you are in your financial journey and your stomach for taking on risk (risk can be considered the volatility of returns in your investment portfolio). Your stomach for risk or your ability to take it on may be difficult to pinpoint, so understanding where you are on the traditional financial journey may be helpful as a general reference point. But remember, once you pick an allocation, you must be able to stick to it in both weak, rapidly receding market conditions as well as strong, rapidly rising market conditions. Life events, not the condition of the market, should be what dictates a change to your asset allocation (stock to bonds mix).
6. Keep Your Investment Costs Low: Indexing helps you keep investment costs and expenses low, but choosing your brokerage firm (where you hold your accounts that are not active company retirement accounts) is important too. Find a place that does not charge you account opening fees, custodial fees, or transaction fees. In today’s investment environment you do not have to, and therefore should not, pay transaction fees or commissions to a broker. The only expense you should have is the expense ratio of the index funds (ETF) that you utilize. The expense ratio should be as low as possible.
7. Invest With Index Funds, Don't Try To Pick Individual Stocks: Invest in index funds and utilize ETFs. ETFs are a basket of securities (stocks or bonds) that generally follow an “index”. An index is simply an idea. A company has to implement the idea by creating a Mutual Fund or ETF that tracks the index. Running a business or in this case, a fund, costs money. That cost is then passed onto you, the investor, through the “expense ratio”. When you are selecting investments and in this case ETFs focus on the expense ratio, NOT PAST PERFORMANCE. Find an ETF that tracks the index that you desire investing in and then find the fund provider that has the lowest expense ratio available. Doing this maximizes your investment return.
8. Spend Time In The Market, Don't Try To Time The Market: The magic of compounding interest relies on time to allow it to work for you. Professionals very rarely beat the market. Stay-at-home traders very rarely beat the market. If either of them do randomly happen to beat the market, they very rarely do it multiple years in a row. If they do happen to be the few that do it multiple years in a row, then they likely don’t do it consistently over time. Even if they did, picking the professional that will beat the market consistently over time before they have proved themselves, is nearly impossible. Therefore there is no point in trying to beat the market or trying to find the guy that can. Your best bet is to take the return that the market gives you, at your desired risk exposure level. Spend time in the market, rather than trying to time the market swings, to maximize your investment returns. Don't waste your time with active trading. Focus on your day job and control what you can control... Your spending, your savings rate, and your level of investment risk exposure.
9. Minimize Your Taxes (Asset Location): You should certainly pay the taxes that you owe on investment profits, but you should not pay more in taxes than you owe and you should definitely not overpay due to portfolio management laziness or a lack of paying attention to your investments. You must care enough to make sure that you are doing the basics correctly. Because of time and compound growth, good tax avoidance habits as well as bad habits are magnified over time. On a simple level, you want to put your growth assets (your stocks) in your taxable accounts and your interest earning investments and fixed income assets (your bond funds) in your IRAs, 401-k’s or other tax-deferred accounts (403-bs, TSPs, CRAs).
10. Diversify & KISS: Diversify, but remember "KISS". Keep it simple... Utilize 3 to 5 fund portfolios or other simple portfolio management styles. You can also alternatively utilize a Wealth Advisor, Money Manager, Robo Advisor, or a Target Date Fund if you do not wish to manage your money yourself.

*Bonus Rule: Stay The Course And Focus On Your Day Job! Focus on your day job. You will almost certainly not get rich by day trading. But through prudent investing and financial planning you will grow your wealth over time. This is possibly the most important rule, even though it is the bonus rule. If you can’t stick to a plan over the long haul, all the planning in the world won’t help. A workable plan is important and sticking to the plan is what brings long term financial success.

Disclaimer: (The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation. Examples provided are provided for illustrative (or "informational") purposes only and are not intended to be reflective of results you can expect to achieve.)