Ask Paul: What are the money rules I should live by?

Dear Paul,

In responding to Geoff, who was moving to Japan, you mentioned your long-standing money rule No. 1 (spend less than you earn) and rule No. 4 (do not let tax drive investments). 

These are great rules, but what are rules 2, 3 and 5?  - David

Ha, ha! Very good, David. I needed a chuckle and it was remiss of me to write about rules 1 and 4 while not mentioning rules 2, 3 and 5.

Rule 2: If it looks too good to be true, it will be

If someone is promising you higher returns with no risk, they either are a liar, an idiot or a crook.

Whether it is the Dutch tulip bust of 1634, share-trading computers that will make you 60% a year or wealth from nothing at a seminar, it will be a scam.

Rule 3: Make the most of compound returns

First, re-read rule 2.

Compound returns are one of the miracles of investment and one of the few miracles that is actually true. It is where anecdotes like "money makes money" are right.

This is why home ownership, a share portfolio or a decent super fund are rolled gold. If you follow rule 1 and spend less than you earn, rule 2 and don't get ripped off, you will end up with decent assets (see rule 5).

If, over our working lives, we create a pool of decent assets, compound returns will help do the work for us and we can live off the returns.

Rule 5: Invest little, invest often

If you have lots to invest, good on you. But most of us don't, in particular when we are young.

So, invest a little whenever you can. This builds great habits. With super, exchange traded funds, adding to your mortgage payments and so on, it is also easy.

This rule also forces you to set up a budget. You can't save if you don't plan to save.

My happiest days in the world of money are where someone says to me "Paul, I saw your Money show on Channel 9 back in the early 1990s. I thought it sounded ridiculous, but I added a little each week to my mortgage ... and paid it off many years early, allowing me to build other investments. Thank you."

So, there you go, David, and thanks for asking.

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