The entire construct of personal finance can be intimidating, especially if you’ve never learned very much about it (most everybody). Even when you attempt to learn…. the Internet is full of so much mixed information it can be difficult to know what you should believe.
If you know nothing about money (or a great deal), there are really just a few basic things you need to understand in order to start taking control of your finances. Once you grasp these concepts and apply them to your own life, you will begin to see a much brighter future with money. Regardless of how much you’re making, there are five rock solid money rules to always live by. These are guidelines that will allow you to take, and maintain, control of your money – both now and in the long haul. Jot these down and keep it somewhere convenient because these are essential money rules you can live by long term!
1. Spend less than you make
Nothing new here but it’s no less important. It may sound like a simple concept, this can take years to finally realize the difference this idea can have on your life.
The harsh reality is that until you learn to spend less than you make, you will never get on the path to financial freedom of any kind. How do I define that freedom? It’s the ability to make your own decisions when and how you want to make them, without having to rely on someone else’s approval (your significant other notwithstanding, he/she may still have a say).
The longer you continue living paycheck to paycheck, or week to week – the more difficult it becomes to break the endless pain cycle.
This isn’t an income equation on it’s own and I’m not saying start using single ply toilet paper and walking to work. Just learn to optimize every aspect of your spending and focus on what’s truly important to you. One easy example of this is your cell phone plan. If you are in the US and currently using one of the major four carriers see if you can live with an MVNO (someone who rent’s their network as an off-brand provider and charges less). Xfinity Mobile by Comcast is a good example of an MVNO that uses Verizons network and has plans starting at $12 per month.
2. Stop trying to “wing it”
Do this thing the correct way and take inventory of every expense you have on a piece of paper or spreadsheet. There are plenty of fancy apps that accomplish this but it has more impact for most people to go old school and write it down on paper.
Once you have it all written down go through the list line by line and determine what really provides value to your life. If you have a 60k Mercedes for example and a 6 mile commute, is it worth the opportunity cost on that money to not be investing it? What if on the opposite end of the spectrum you pay $150 for a Verizon phone bill and work from home – would an MVNO like Xfinity on the same network for $12 have any negative impact on your life?
Don’t get all crazy day one and go scorched earth, just find ways to optimize and create space in your monthly equation. This needs to be a long term sustainable life change for it to be meaningful!
3. Kill all the income suckers (also known as debts)
This is the tallest hill to climb for most people starting out but it also tends to yield the most relief once completed. Being consumer debt free is crucial to building wealth for anybody and increasingly so for people who make the average household income. Credit card debt (high interest) is the worst kind and taking that out will make the biggest difference on day one. There are several methods to doing this with prioritizing debt size or interest rate but behavioral science would dictate writing them all down from smallest to largest and attacking the small ones first for quick wins to be best. Student loans are also an issue for many people, be smart about it and see if you can’t consolidate assuming they are sizable – also look for a better interest rate. Any action you take is better than nothing at all.
The elephant in the room (at least in our good ole US of A) is auto debt. The average car loan hovers around $475 per month, which for most people is a major drain on their personal economy. I’m a car guy al the way, always have been a fan of nice wheels – but there is a time to enjoy them and that time is when your are on solid financial ground. When you get there by all means enjoy a nice ride and if your credit is good enough go ahead an finance it with a low interest rate. That sounds counter intuitive to typical personal financial advice but in this low interest rate environment if you can borrow at 2% and earn a nice return of 7-12% why wouldn’t you do that? For he sake of getting started though, make sure your auto situation is in line with your overall financial goals.
4. Invest constantly and stack up your savings
Interest works only two ways when it comes to money, you either pay it or earn it. Wouldn’t you rather earn it than pay out? Let’s get started down that road then!
Automatic is best
I have an entire post about why automatic investing is the way to go, it all comes down to behavior. When you can make something good happen for you on a regular basis without any thought, it’s an easy decision that you only have to make once. Don’t just automatically invest though, also make sure to automate setting cash aside in a savings account and if you don’t already have one an emergency fund.
When it comes to investing the saying is “The best time to invest is always 20 years ago. The second best time is today”.
5. The guy/girl in your mirror
Only one person is truly responsible for your financial future, that would be YOU! Don’t just read this article and think of all the possibilities it opens up or dream about the coveted “Financial Freedom” that sounded like a pipe dream before this. Take action! Today!
This is a “YOU” thing and even if you only do 10% of what these 5 things entail you can be 10% (or more) richer because of it. There is no “end all, be all” personal finance solution and there is definitely no magic pill (for the snarky answer of lottery I would say google that and see how many end up worse off than before winning).
Personal finance is a lot like the book about that turtle and hare – slow and steady will win the race almost every time. But you can’t win this race if you don’t start going down the right path.
Let’s do the math
Calculate your mortgage or work with the compound interest to see what it can do to expedite your wealth building.