Personal finance can be a daunting topic for many people, but it is a crucial aspect of life that everyone should take seriously. Whether you aspire to become a professional investor or simply want to manage your money better, there are a few fundamental rules you should follow to achieve financial success.
Here are 20 personal finance rules to live by:
Avoid credit card debt like the plague. The first rule of personal finance is to never carry a credit card balance. Credit card borrowing rates are outrageously high, and paying those rates is an easy way to negatively compound your net worth. If you carry credit card debt for a prolonged period of time, you're not ready to invest your money in the markets.
Building credit is important. Likely the biggest expense over your lifetime will be interest costs on your mortgage, car loans, and student loans. Having a solid credit score can save you tens or even hundreds of thousands of dollars by lowering your borrowing costs.
Income is not the same as savings. There is a huge difference between making a lot of money and becoming wealthy because your net worth is more important than how much money you make. Having a high income does not automatically make you rich; having a low income does not automatically make you poor. All that matters is how much of your income you set aside, not how much you spend.
Saving is more important than investing. Paying yourself first is such simple advice, but so few people do this. The best investment decision you can make is setting a high savings rate because it gives you a huge margin of safety in life. You have no control over the level of interest rates, stock market performance, or the timing of recessions and bear markets, but you can control your savings rate.
Live below your means, not within your means. Living within or above your means is how you end up going from paycheck to paycheck without ever truly building wealth. The only way to get ahead is by living below your means and setting aside a portion of your income for the future.
If you want to understand your priorities, look at where you spend money each month. You have to understand your spending habits if you ever wish to gain control of your finances. The goal is to spend money on things that are important to you but cut back everywhere else. And if you pay yourself first, you don't have to worry about budgeting—you just spend whatever's left over on the things that truly matter to you.
Automate everything. The best way to save more, avoid late fees, and make your life easier is to automate as much of your financial life as possible. The goal is to make the big decisions up front so you don't need to waste so much time and energy tending to your finances.
Get the big purchases right. Housing and transportation are the most important purchases in terms of keeping your finances in order. Overextending yourself on these two purchases can be a killer because they represent fixed costs and come with more ancillary expenses than most people realize.
Build up your liquid savings account. Your monthly budget should take into account the fact that there are infrequent yet predictable expenses you will need to take care of on occasion. Weddings, vacations, car repairs, and health scares never occur on a set schedule, but you can plan on paying for these events by setting aside small amounts of money each month to better prepare yourself when life inevitably gets in the way.
Cover your insurable needs. Buy insurance because there will be a financial impact on your business or family if you were to die or become disabled. The idea is to measure that impact in dollars and, if possible, ensure against it.
Always get the match. Save enough in your 401(k) plan to get the employer match. You should not be leaving free money on the table.
Saving a little more each year can help you increase your savings over time. Whenever you get a raise, increase your savings rates. This way, you will not even notice that you have more money, and you will be able to save more.
It is also essential to choose your friends, neighborhood, and spouse wisely. Trying to keep up with spendthrift friends or neighbors is a never-ending game with no true winners. Find people to spend your life with who have similar money views as you, and it will save you a lot of unnecessary stress, envy, and waste.
Lastly, it is crucial to have a plan and stick to it. It doesn't matter how much money you make; if you don't have a plan, you'll never be able to achieve your financial goals. Make sure you have a budget and a plan for savings and investing, and review them regularly. This will ensure that you are on track to achieving your financial goals and building wealth over time.
Overall, personal finance is not rocket science, but it does require discipline and a willingness to prioritize your financial goals. By following these 20 rules, you can take control of your finances, avoid debt, save more, and build wealth over time. With persistence and consistency, you can achieve financial success and live the life you wan
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