The Top 25 Money Tips of All Time By Leading Personal Finance Experts

Perhaps Canada is just backward, but I don’t think so. MoneySense asked some of the northern country’s top personal finance experts for their top money tips, and they gave some surprising answers.

Do you think it’s all emergency funds and the “power of compound interest?” If so, you’re wrong. Here is what they had to offer:

1. Money is a tool, not a solution

Do you accumulate money just for the sake of doing so? Do you save what you earn so that your net worth climbs higher. Are you aching for the positive comments you’ll receive when you post your net worth online? Money’s function is to acquire things. More specifically, money is a tool to acquire “goods and services you find useful.” What good is $50,000 if it never gets used?

2. How you spend it is more important than how you invest it

“The only way — we repeat, the only way — to amass money is to live on less than you generate.” That’s sensible; live below your means, spend less than you earn. Either axiom is a popluar mantra whether you’re reading The Motley Fool or talking to a financial advisor. Consistently spending more than you have is a voyage to disaster.

3. Love your job — or leave it

This is interesting. If you look around personal finance blogs, you’ll find people analyzing the latest salary report from CNN or another source. Which college degrees are the hottest? What professions are earning the most money after graduation? If you love what you do rather than choose your profession according to what makes the most money, you’ll work at it harder and consequently earn more money doing so. While you’re enjoying your job so much, you may just forget to retire, having no desire to stop “working.”

4. Put first things first

I’m not a big Suze Orman fan, but even I agree with her bite-sized nugget of wisdom: “People first, then money, then things.” Spend as much time taking care of your health as you do taking care of your finances. For every hour you spend in front of Quicken trying to make sense of your mess, spend an hour jogging or playing tennis.

5. Know your spouse

By this, the authors mean understand how your spouse approaches finances. “Schedule a time at least once a month to sit down and discuss money matters with your spouse before minor irritations turn into a major crisis. Better yet, if you’re not already married, take money attitudes into account when choosing your partner.”

6. Invest in your kids

The article talks about RESP accounts, which are savings accounts designed for parents to invest for their children, with a bonus matching contribution from the government. No account in the United States offers this kind of guaranteed return through matching contributions, but the Ford Foundation suggests how these might work.

7. Give now

This suggestion stems from the gift tax versus the estate tax. It might be beneficial to give funds to your descendants while you are alive rather than leave funds for them through a will.

8. Talk it over

There are many things in the world in which communication is key. Money issues are no exceptions. “The best and simplest way to avoid problems after your death is to talk things over with all of your kids and other heirs well ahead of time.” The advice seems to be for those ready to pass on their wealth, but communication is important in any instance that involves another person, which includes just about every situtation.

9. Look at all-in costs

It may cost a certain amount to aquire something, but before making a decision, you will need to consider all costs. The classic example is a house. I’ve heard many people tell me that for “just a little bit more” per month, I could be making mortgage payments on a house rather than renting. That doesn’t take into account the down payment, expenses to maintain the house, taxes, and so on. What about the true cost of a car? Edmunds.com offers a true cost to own calculator that determines the real price of owning and maintaining a specific vehicle. You should always be looking at the true cost to own anything you plan on purchasing.

10. Set goals

This is another hot topic on personal finance blogs. The article suggests setting short-, medium- and long-term goals for yourself in order to track your progress. If you combine this tip with the first tip, “money is a tool,” you might determine that the goals you set shouldn’t be hard net worth numbers, but they should be goals on a more personal level.

11. Emphasize rewards

“Think of a budget as pre-spending and emphasize the objects or experiences that you want to spend money on.” This sounds psychological, but putting yourself in a positive mindset can be helpful. If budgeting is somehow designed to be “fun” rather than a chore, you have a better shot of sticking to the plan.

12. Use debt intelligently

A number of people have been burned by debt and they believe that all debt is evil and must be avoided at all costs. You can compare that to alcoholics that are finally on the wagon (or is that off the wagon?) and who will not drink alcohol again. Anything is found in moderation, including debt. Debt can be used to your advantage in a number of cases. You can leverage your expenses by using a credit card and paying the balance off each month. You can even borrow money to purchase investments (for example, a house) when the risk-adjusted return is higher than the interest you’ll have to pay to borrow.

13. Take the long view

Ah, compound interest does show up among these tips. The financial advisors recommend automatic investing in a low-cost, well-diversified portfolio (that also includes precious metals, real estate, and even alternative investments). We all know what Robert Kiyosaki thinks of diversification, but others seem to think it’s a good idea, which brings us to…

14. Diversify, diversify, diversify

“This is the most important rule of investing… Your portfolio should span both stocks and bonds and ideally should include foreign as well as domestic investments.” When you diversify across mutual funds, you should look at what the funds consist of rather than the general description of the fund. If I hold several mutual funds, but the top investment in each is Microsoft, then I’m not getting the diversification I think I am.

15. Plan your portfolio, then stick to your plan

The plan they are referring to is your asset allocation. Decide on how you want your portfolio divided between items offering varying degrees of risk, and then rebalance your portfolio occasionally (quarterly or yearly for example), so you are not overwighted in one type of investment that had a good run recently.

16. Be cheap

The financial advisors intereviewed are concerned that paying 2% for investing advice every year cuts into your profits. According to their calculations, you lose a third of your investment to fees after paying this percentage for 20 years. This stresses the importance of choosing mutual funds with low expense ratios. Vanguard offers mutual funds with very low management fees. My mutual funds come from TIAA-CREF, which also offers low fees at the current moment.

17. Forget last year

While you’re shopping around for mutual funds, don’t be swayed by a fund’s recent performance. “Top performers in one period often lag behind in the next,” according to MoneySense. When salesman try to sell you a fund, they’ll try to sell you something that has performed well recently, but that isn’t always the best choice. The magazine suggests looking for consistency in performance year after year, but that’s not a surefire way to make millions of dollars, either.

18. Ignore your portfolio — selectively

“Smart investors avoid looking at their portfolios too frequently.” Most of the time, you’re investing for the long term. Daily fluctuations don’t matter much when your time horizon is several decades. If you watch your accounts every day, you may let your emotions take hold and react poorly. The magazine doesn’t say precisely what it means with the “selectively” qualifier, but in my interpretation, you should be watching your accounts for larger-scale patterns. That will allow you to get out of really bad investments or into exceptional opportunities.

19. Keep it simple

Investing doesn’t have to be complicated. You can instantly create a well-diversified portfolio by looking into one of Vanguard’s Life Cycle Funds, some of which target a particular date for retirement and adjust the asset allocation automatically. With one fund, you have instant diversification. There’s really no point in delaying investing because you believe it’s too difficult; the longer you wait, the more you’re missing out on compounding returns. Start out with one fund like a Target Retirement fund and as you educate yourself, add what you need in order to diversify further.

20. Look for the right fit

When searching for a financial advisor, the magazine suggests asking the potential expert what type of clients they prefer to work with. If their description doesn’t match you, then move on. I would go with someone who charges a flat fee rather than a percentage of assets (more about this next time), but I agree with the magazine. For example, if the advisor has only experience with high net worth clients, he or she may attempt to provide products or services, not within my price range.

21. Understand how your advisor is paid

This is an important aspect of completing that task. Some advisors are paid by commission when selling certain products. You can be sure he or she will be looking out for his or her own interests (making money through commission) rather than offering what is truly best for the customer. “ask your adviser to put on paper a complete list of all the ways he or she will derive compensation from your account, as well as estimated amounts…only by understanding your adviser’s incentives can you judge whether the advice you are receiving is unbiased.”

22. Consider risk

The article says you should have your advisor put any statements including the phrase “no risk” in writing. Anyone promising high returns with no risk is trying to take advantage. If markets are efficient, any no risk, high return opportunities will be gone long before we regular folk will have access to them.

23. Ask questions

Ask for credentials. Ask for the fee structure, as we mentioned above. Ask for discounts.

24. Beware of 10% solutions

I’ve heard many estimates of a 10% annual return in the stock market, but a 5% to 7% return is more likely. The 10% figure that is common excludes fees and was calculated at the height of the stock market book in the 1990s, according to MoneySense.

25. Write it down

Any investment conditions you would like to set should be written down in a formal agreement. You could call this an “investment policy statement,” and it may outline types of funds (like those containing investments in tobacco, defense contractors, or Japanese auto makers) that you wish to exclude from your portfolio. It should also outline your risk tolerance and your expected returns. “How do you know if your statement is complete? Ask yourself if a new manager who has never met you could, with only that information, handle your portfolio the way you would like. Only if the answer is yes should you be satisfied.”

It took me a while to finish posting the series, but these top 25 tips are excellent suggestions for maintaining personal finances and working with an advisor. Remember that these tips came from advisors, so they may be biased. Some people prefer not to work with advisors. Everyone needs to make a living and it’s often difficult to determine who in the services industry is really there to help the customer rather than their own.

Wondering where to begin looking for personal finance experts? check out Paladin Registry.  They are reliable long time players in this business, they vet and rate every featured professional and…they offer their service for free.

The more educated the customer is, the more of a chance he or she will succeed.