FOOL'S EYE VIEW
Five Golden Rules Of Money

By Stuart Watson (TMFTiger)
November 20, 2001

Great Titchfield Street, London – All this week we're running of a series of articles based upon the new book called Investing Rules. I thought I'd add my thoughts along this line as well, although these five rules are primarily aimed at financial decisions other than investing directly in shares. It's rather pretentious to call them golden rules, but what the hey! They've served me well so far! 

1. If something looks too good to be true....

We're all looking for that little bit extra, hunting for short cuts to increase our wealth (or reduce our debts). But most of the time, the higher returns are just illusions and short cuts turn out be dead ends. One of the key concepts in finance is risk and return. The higher the return you shoot for, the greater the risk you are taking on. Therefore, it's impossible to earn a high return without taking on excessive risk. Likewise, if you don't want to take any risk, you'll have to settle for a lower return.

So products that promise 'stock market returns without the risk' need to be treated with the utmost caution. Sometimes the risks are hard to spot. They may be hidden in the small print or they may arise due to some event that, whilst quite rare, is potentially devastating.

At the moment, the risk-free rate (defined as the rate you get from borrowing money from the government) is a shade under 5%. Anything higher than that implies risk is being taken on, or that the rate of return is not sustainable. In fact, the FSA recently issued a warning on just this subject. They're concerned that when overall rates of return are lower (as they are now due to low inflation), people will get sucked into schemes that promise far more than they can ever hope to deliver.

2. Keep costs to a minimum

In most walks of life, paying that little bit extra is often worthwhile. Cheap products don't last as long or give  the same level of satisfaction. But money is a little different. Essentially it is a commodity. The basic products on offer are broadly similar, no matter which company is selling them. The main differentiation is the price; in other words, the charges you pay. In most cases, the cheapest product will offer you the best value over the long-term.

But most financial marketing goes into pretending a company's product is different, by which of course they mean better. Costs are rarely talked about, or they are hidden in the small print. For any major financial product, you need to consider the price you pay and look to minimise it. The same goes for advice about money. Paying for advice is fine (it gives you someone to blame if nothing else!), but don't make the mistake of thinking that expensive advice must be good advice. 

3. Save on a regular basis, from as early as possible

The best way for most people to save or invest is on a regular basis. Set up a monthly direct debit so that the money is put aside before you can get your greedy little mits on it. Although the more you save, the better, no amount is too small, especially when you are just starting.

Start as early as you can as well. The more time you give yourself, the more time your money has to work for you. The longer you delay, the more difficult you make it for yourself. You have to appreciate that you need to get off your butt and take steps to make this happen.You aren't going to wake up one morning and be able to say "all my finances seem to have magically sorted themselves out. Oooh, isn't that nice!"

4. Monitor your progress and make adjustments if necessary

On a regular basis (once a year is probably sufficient), you need to take a few hours to take stock of your financial position. You don't need to be correct down to the nearest penny. In fact, you should probably do the sums in round hundreds or even thousands of pounds.

Calculate how much you saved in the past year and look for ways you can do better the following year, if you think that's necessary. Look at how much money you have at the moment and how much you plan to save in future. Be realistic. Ask yourself "will it be enough, or should I put aside a little bit more?"

5. Don't worry about the short-term

Thanks in part to the financial media, we're all obsessed with the short-term. What did the market do yesterday? Will shares rise before Christmas? These are the wrong questions to ask. One fault many of us have is that we assume what has just happened will also happen in the immediate future. This is why everyone jumps into the stock market when shares have risen but then throws in the towel just after they have fallen.

Focusing on short-term movements is bad for your financial health. The world doesn't change that quickly. If it's a good idea today, it will still be a good idea tomorrow. Any time you feel you have to "buy now or miss the boat", alarm bells should be ringing.  Take a deep breath and have a lie down somewhere instead! It's much more relaxing, not to mention safer.

Resources
Compound Interest Calculators 
Financial Health Check 
Get Out Of Debt