The Ten Commandments of Personal Finance


It’s been quite a week for my friend, Fritz. On Thursday, his post Retirement Is Hard was the top featured article on Rockstar Finance. Nice job, Fritz! And today, he has the incredible honor of guest-posting on my blog. It’s good to be Fritz, ain’t it? In all seriousness, though, Mrs. Groovy and I really admire the work Fritz has done over at The Retirement Manifesto. The article below is his #1 most viewed post, with over 10,000 views to date. It’s a good outline of some key principles, and a good reminder for us all. I hope you enjoy it.

Is it possible that there are some basic principles upon which your personal finance journey should be built? It turns out there are. I’ll warn you in advance—you may not like some of them. Just as THE Ten Commandments guide us away from our personal nature which is sometimes tempted to do things which seem fun at the time, but lead to long term harm, these “Personal Finance Commandments” can guide you away from doing things which will bring harm to your long term financial goals.

In full transparency, I didn’t come up with the original list. That honor goes to this article from MoneyStepper, which I just read tonight. I liked the concept and the guidelines presented so much, I’ve decided to build on the original article with original thoughts of my own, including the “10 Commandments” title. In my quest to “Help People Achieve A Great Retirement”, I think there’s a lot of room to share some of the best concepts I come across in my heavy reading on personal finance topics. This one’s a good one, and worth my effort to build upon the concept.

Strive to achieve as many of these commandments as you can, and you’ll be well on your way toward financial independence. Break them, and suffer the consequences.

The 10 Commandments Of Personal Finance

  1. Keep Your Housing Costs Under 25% of Your Net Income

Personally, I like these “rule of thumb” guidelines to help you decide how much of something you can afford. When you’re shopping with a realtor, or talking to a banker, they often attempt to “stretch” you to a ratio that’s higher than you should really undertake. So, look at your last paycheck. How much went into your bank account? If you rent, your rent should be less than 25% of your monthly NET pay (after taxes).  Ditto on your mortgage payment. If you’re spending more than the 25% “commandment”, consider downsizing, or seek out a job with higher pay.

  1. Keep Your Mortgage Under 2.5 Times Your Annual Salary

Interesting that the first two “Commandments” focus on housing costs. Appropriate, given the cost of the roof over your head is the highest expense you’ll incur in your personal finance journey. Manage it carefully, and don’t buy “too much” home. If you’re making $50,000/year, your home should be worth $125k or less.

  1. Don’t Buy A New Car Unless You’re A Millionaire

I LOVE this one. Bottom line: buying a new car is stupid (yes, I said Stupid!). It depreciates immediately, and it’s expensive. It’s one of the worst personal finance decisions you can make. Don’t “Buy New”! After a few months, it’s “just a car”. Within a few years, if you’re like most people, you’re “itching” for another one. AVOID the materialism—focus on the function. My wife and I have bought used cars for years, and paid cash for all but our first one. We bought her last car new (a 2012 Hyundai Sonata for $25k), but I’ve told her she can’t sell it until it has over 200,000 miles on it. Oh the fun we have on this topic. Yes, this one is a HOT button for me. Don’t let Madison Avenue talk you into a mistake. Here’s a challenge for you, which I’ve accomplished with several of my cars:

“$1,000 PER YEAR”

Depreciation, that is. Make it a personal goal. Think on it.  If you buy a $20,000 car and sell it in 3 years, you’d have to sell it for $17,000 to achieve this goal. It can be done, I’ve done it twice (most recently with my 2002 Miata, which I bought for $12,000, and sold it 6 years later for $7,000). It’s really, really hard, but it helps you keep your car expense where it should be—MINIMIZED!

  1. Maintain A Savings Rate of 20% or More

I know, I know. You have a million reasons…. Get over it. When you get your next pay raise, divert the majority of it to savings. For example, if you get a 3% raise, increase your savings rate by 2% ON THE SAME MONTH that your pay increase hits your paycheck. You’ll never miss it, and within a few short years you’ll be over 20%. With pensions gone the way of the dinosaurs, and Social Security anything but secure, it’s critical you save at the 20% level to have a realistic chance of a “normal” retirement. Or, you can keep making excuses. Don’t say you haven’t been warned when you’re 70 years old and fearing for how you’re going to live on your meager savings. Do it now, while you still have time. You’ve been warned. Again. Getting the hint?

  1. Earn A Minimum Of 5% On Your Net Worth

This is a new one, and my compliments to MoneyStepper for the concept. He argues that you should look at the return on all of your assets (including home value) and strive to achieve a minimum of 5% return. This is necessary to grow your savings into a large enough asset pool to offset inflation and provide the income you’ll need in retirement. The takeaway for me—keep your assets widely diversified, and don’t get in the trap of “too much in cash” beyond your 6 month emergency fund. You must earn a higher return than is possible on fixed income investments to grow your assets at the rate they must grow to reach your objectives.

  1. Think Before You Act

I’ve modified MoneyStepper’s rule, which read “consider every financial decision carefully via an investment analysis”, to a simplified “Think Before You Act”. Personally, I think the use of “investment analysis” scares people off, and it’s not necessary to make the point of this Commandment. The point here is to realize that your longer term personal finance success is nothing more than a long journey of little steps, every day. Don’t make spontaneous decisions on topics related to money (see Commandment III above), but realize that every decision you make has a long term impact. I’m a big fan of annual Net Worth tracking, as it gives you a nice way to see the results at least once a year from all of the little decisions you made during the year.

  1. Pay Off Your Highest Debt First

Make getting out of debt a huge focus. One could argue whether it’s best to pay off your “Smallest Debt” first (Dave Ramsey’s “snowball” method) or your “Most Expensive” debt first. Viewed strictly from a financial perspective, you’ll come out further ahead if you tackle the most expensive debt first. From a motivational perspective, the “smallest first” may be more encouraging. The point is: attack debt, and attack it HARD. It’s the fiercest enemy of your longer term financial goals (right up there with Procrastination!).

  1. If It’s Not In The Budget, Don’t Buy It

Yes, that means you need to have a budget. A friend and I have had this discussion, and he believes if you’re saving more than 20% of your pay you don’t need a budget (as long as you’re not in debt). His logic—you’re saving 20% and you’re debt free. You don’t need to micro manage as long as you don’t spend more than the 80% remaining after your savings. I’ll give him that. Using the same logic, if you’re NOT saving 20% or more, or you’re in debt, you need a budget. If you’ve never done one, try it for one month. The purpose of the budget is to avoid making mistakes in your discretionary spending, which is exactly the point of this Commandment.

  1. Never Go Shopping Without A List

We’ve all been there, right? This one works. Make it a habit, and only buy the items on the list!

  1.  Always Think In Terms Of Hourly Value

The MoneyStepper author uses this rule to guide you on what you should hire others to do. If you can make $20/hour working, but instead you spend an hour mowing your yard that you could pay the neighbor kid $10 to complete, pay the kid. I have a bit of a different opinion on this one. You should only pay the kid if you WILL work the extra hour making $20 instead of mowing the yard. If it’s a choice between watching TV and mowing the yard yourself, mow it yourself. You just made $10 more by investing your time instead of paying the kid. Also, I think it’s helpful if you think of items you’re considering purchasing in “Hour Terms” instead of “Dollar Terms”. If you think about how much work it took you to pay for something, you may be just a bit more hesitant to open your wallet buying yet another thing you really don’t need.

So, there you have it. 10 Commandments For your Personal Finance. See how many you can apply in your own life. The next time you’re facing a money decision that falls within these commandments, stop and think. If you do that, the past 2 hours of my life spent writing this will have been invested wisely.

Make me proud.

Author:  [email protected]
The Retirement Manifesto
Helping Others Achieve A Great Retirement

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  1. I had never heard the 2.5 times salary as a max for mortgage. That sounds like a really helpful framework even though my income is variable. Thank you for posting it. It’s lovely how folks can grow others’ knowledge a tiny bit at a time.

    • Mr. Groovy

      Hey, ZJ. When I was fresh out of college (1984), I remember my relatives saying that housing should cost approximately 3 times your salary. Fritz’s guideline is a little more stringent. But if the majority of home-buyers in the early to mid 2000s had heeded either the 3 times or 2.5 times guideline, would we have had an economic implosion in 2008?

  2. Good points all. I particularly like “V. Earn A Minimum Of 5% On Your Net Worth”
    Both while saving and while retired why bother with assets that have low expected rates of return?
    Scary thing right now is that bond yields are so low: Less than 2% nominal (=0% real CPI adjusted) for 10Y Treasury bonds and corporate investment grade maybe 3.5% nominal, 1.5% real. Cash and CDs, oh my, don’t remind me. So for us that means mostly equity and real estate investments.

    • Mr. Groovy

      Hey, ERN. Commandment V got me thinking as well. How do you even measure it? December 31 net worth minus January 1 net worth divided by January 1 net worth? And how do you calculate the appreciation on your real estate, if there was any? Case-Shiller index? I’m definitely going to pick Fritz’s brain on this one. The 5% target looks pretty tough in this interest-rate environment. Thanks for stopping by, ERN. I appreciate your thoughts on this matter.

      • For Real Estate I would use Zillow minus 5% (commission). For overall net worth return I would use time-weighted rate of return or IRR (both take into account inflows and outflows). If the flows are small relatively to Net Worth (in retirement they should be) the two measures will be very close.

      • Also: due to volatility in stock prices you would not reach that 5% goal ex post every year. So maybe the 5% rule more of an ex ante rule: Don’t invest in anything that doesn’t even have the potential/expected return of 5% return. After the fact, you can have some bad years of course (2008, don’t even want to think about it, haha).

        • Mr. Groovy

          Hey, ERN. I like your guideline. Let me ask you a question. I calculate my year-to-date return at 5.01%. I got it by dividing my market gain-to-date by my current net worth. Is that the right way to calculate my return? And, yes, I prefer not to think about 2008 either. Thanks for sharing your insights.

  3. Grocery lists are such budget breakers for so many people.

    Shopping with a list is a big one. I have few rules for shopping at the grocery store: Only spend 15-20 minutes, go early like 8:00 or 8:30 when few people are there, and take a list!

    I used to spend so much money at the grocery store until I started doing these things. Suddenly my grocery bill went from $125/week to $70-80/week.

    To be fair I live with my roommate so it might be different for a family of 4. I rarely use coupons unless they’re digital coupons I can attach to my store rewards card.

    • Mrs. Groovy

      Jaime, you did very well with lowering your grocery expenses! I use an app for my grocery list and I always do much better when I shop with cash. But I like the convenience of my debit card, which makes it a little to easy to veer away from my list. Next time I feel like doing that I need to follow Fritz’s advice – “Stop and think”.

  4. A great list. Absolutely no doubt someone would end up doing quite well for themselves if they followed all, or most, of these Commandments.

    • Mr. Groovy

      Amen. Until I was in my early 40s, I had no idea how harmful a car can be to your financial health. Fortunately, I never made enough money to even consider buying a new car. I’ve always bought used. But even, then, I still bought way more car than I needed. And I was also a jerk who drove too fast and condemned a couple of cars to an early grave (i.e., the junkyard). Thanks for sharing, Graham. I appreciate your perspective.

  5. The first 2 commandments look very strict to me… when we stared out, we were above that. Mainly because the bank told we could…
    In any case, I am happy that a few years later, we live in line with the commandments.

    • Amber! Nice to see you over here (a loyal reader of my site!). Thanks for the comment. I think it’s good to push a “strict” guideline to wake people up sometimes. I agree it’s aggressive, but it certainly makes a point!

    • Mr. Groovy

      Hey, Amber Tree. These commandments do set a high bar. Young Mr. Groovy couldn’t have possibly met them. But with age, wisdom, and Mrs. Groovy, of course, they happily became doable. I like Fritz’s point about the need to “wake people up.” Far too many Americans are in a stupor when it comes to finances. These commandments just might be the kind of jolt they need.

  6. If all we need to do is follow these commandments, then we’re doing pretty well. We will pay off our debt (highest interest rate first) and stay on this path. Great list.

    I see so many of my friends buying pretty expensive houses lately. No way they’re following Commandment II.

    • Mr. Groovy

      Hey, Harmony. Yes, these commandments won’t steer you wrong. I particularly like Commandment II as well. Housing is basically a box. No reason to sabotage your future welfare for a grandiose box. Your bed doesn’t care if it’s sitting in a 400 sq. ft. room or a 144 sq. ft. room. Thanks for stopping by, Harmony. Always like reading what you have to share.

  7. Mr. & Mrs. Groovy – thanks SO much for your kind words!! It’s been a fun week. Looking forward to your upcoming excitment with Joshua (not sure if you’ve told people yet, so I’ll leave it at that!). Thanks again!

    • Mr. Groovy

      Hey, Fritz. Our pleasure. We love the work you’re doing, and we’re honored to have you guest-post. Haven’t mentioned anything about Joshua yet. I imagine we’ll make an announcement shortly–providing next week goes well. Got my fingers crossed.