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The concept of personal finance can be intimidating, especially if you’ve never learned much about it (which is the case for most people). And very often, when you try to learn, the Internet is full of so much clutter these days, it can be difficult to know whom to trust.
But here’s the good news: if you know nothing about money (or even if you know a lot), there are really just a few basic things you need to understand in order to start taking control of your financial life. Once you grasp these concepts and apply them to your own life, you will begin to see a much brighter financial future.
Regardless of how much you’re making, there are five golden money rules to always live by — fundamental guidelines that will allow you to take, and maintain, control of your finances — both now and over time. Write these down and keep it somewhere you’ll see it, because these are essential money rules you can live by forever.
5 golden money rules you can live by forever
1. Spend less than you make
You’ve probably heard it before, and while it sounds like a simple concept, it can take people years and even decades to finally realize the impact this idea can have on their life (some people never do).
The reality is, until you learn to spend less than you make, you will never truly reach financial freedom — the ability to make your own decisions, when you want to make them, without having to rely on someone else’s approval (like say, from the bank, other lender or someone else).
The longer you continue living paycheck-to-paycheck, the more difficult it becomes to break the cycle. So the earlier you learn to spend less than you make, the sooner you’ll be able to have a confident and empowered relationship with money.
And it’s not about the amount of money you make, it’s about adjusting your habits and lifestyle in order to improve your life both now and down the road. So when you do start making more money, you can really benefit from the added income, rather than waking up one day and realizing you have no idea where it all went.
Once you start making small changes to your spending routine, you will quickly realize how big of an impact it can have on every aspect of your life. Each step you take, like paying off a debt or getting closer to a savings goal, will give you even more motivation to keep going, because you’ll be able to see the increasing control you have over your own life and your own money.
The hard part (which really doesn’t have to be that difficult)
Living below your means requires you to pick and choose. Maybe you take one less vacation or limit how much you go out to eat. Or maybe you go to dinner with friends, but eat before you go so you aren’t stuck with a big bill when everyone splits the check. You can have a social life without draining your wallet — it just takes some prioritizing.
Decide what’s most important to you and start saving for those things. A few examples may be building an emergency savings fund, paying off debt or buying a house or a car. By making your goals a priority, you give yourself a much better chance of reaching them — and on your own timeline, which is key. Because when it comes time to buy a house and you realize you wasted a lot of money that could have been saved for a down payment, having to put it off won’t be a very pleasurable situation.
Bottom line: If you want to get on the quickest path to reaching your goals, you have to start living below your means — and the best way to do that is to start paying attention to what’s going on with your money so you can keep your priorities in line.
2. Have a plan
The only way to get control of your spending and saving, and actually reach your goals, is to create a plan and track everything.
First, you need to set goals. Figure out what your priorities are for both the near and long-term future and then start putting money away for each of them.
If you don’t know why you’re saving, it often gets put on the back burner. So identify what your big goals are and then start taking steps to reach them. Write them down and put it somewhere you’ll see them — as a reminder of what you’re working for!
Once you’ve identified your goals, create a budget and identify expenses you may be able to reduce. Here are a few examples:
- Subscriptions: You likely don’t need all of those monthly subscriptions and by cutting some of them out, you can put more money toward your goals.
- Cable bill: Look for a cheaper plan or alternatives to traditional pay TV.
- Cell phone plan: Consider a discount wireless provider or at least a cheaper plan that gives you only what you need.
- Insurance: Frequently re-shopping your insurance policies is the best way to get the best deal.
- Best car insurance companies
- Best home insurance companies
- Shopping, entertainment, extra spending.
Finally, once you’ve created a budget with your goals in mind, the only way to actually make it all work is to track everything — every dollar that comes in and every dollar that goes out.
3. Get out of debt
This is primarily about consumer debt, like credit cards, because this is the type of debt that will prevent you from reaching your big goals in life. While paying off student loans and other debts may still be a big priority for you, credit card debt typically carries the highest interest rates and also has a bigger impact on your credit score.
Here are a few reasons getting out of debt is crucial to improving your short-term and long-term financial life:
- Carrying debt will cost you a lot of wasted money in interest charges over time.
- It can damage your credit score, which impacts your ability to make big purchases, like a car or house — since your credit score is a big factor used by lenders to determine your mortgage rate, car loan rate and interest rates on other loans.
- Debt can cause a lot of added stress on every aspect of your life.
So when it comes to getting out of debt, it’s important to get your cards with the highest interest rates paid off first.
Paying off credit card debt that’s several thousand dollars or more takes time — and it also takes discipline. Setting a goal of paying down debt in 60 months (five years) or less typically works best for most people. If you can set a goal of three years, that’s even better! But anything greater than 60 months and people tend to lose their focus. And once you start making progress toward paying off your debt, you may find that you can make it happen a lot quicker than you thought.
Creating a budget and reducing your expenses will help you find the extra money you need each month to put toward paying down debt.
Then start putting the most money toward the credit card with the highest interest rate — this is the one that will cost you the most money in interest over time. So take any extra money you have each month (from reducing bills etc.), and put more toward that card and slightly less toward the other cards. When you reach a zero balance, do not close the account. This only hurts your credit score. Just let it sit at a $0 balance and move on to paying off the next card.
Bonus tip: While you’re trying to pay off debt, it’s important to not take on any new debt. If you find this to be difficult for you, then start paying for things in cash. It’s a lot harder to part with $10 when it’s in your hand and it’s all you have left for the day (or week).
4. Save and invest
A dollar today is worth a lot more than a dollar tomorrow.
The earlier you start saving, the more time you have to build up the funds to cover an emergency and reach your big spending goals (again, think a car or down payment on a house). On top of that, the earlier you save and invest, the more time your money has to grow.
Here are some basic guidelines on starting to save and invest.
Emergency savings: More than 40% of Americans experienced an unexpected emergency expense over the past year or had a family member who did — and a majority of people don’t have the money to cover the cost. The best way to save for unexpected financial shocks is to have two separate emergency funds: a rainy day fund and an emergency fund. This is money you want to keep somewhere you can access quickly and easily, like in a savings account.
- A rainy day fund is money you might dip into every once in a while to cover an unexpected expense, like a medical bill or a car repair.
- An emergency fund is a bigger, longer-term savings fund. This money should be able to cover at least three to six months worth of living expenses in case you can’t work for a period of time, for whatever reason.
Here’s how to start building your emergency savings.
Automate your savings: Pay yourself first. Otherwise, you’ll get to the end of the month and realize you’ve spent what you intended to save. So using your budget, figure out how much you can save each month and have the money directly deposited into your savings account and/or other retirement savings accounts.
Start investing: If you have extra money after saving for an emergency and other short-term savings goals, start investing. Compound interest is one of the most powerful financial forces, because it allows the money you invest now to be worth a lot more down the road. Money saved today is worth a lot more than money saved tomorrow — and this is true for money in a savings account, as well as money in short- and long-term investments.
Here’s a simple investing example: You invest $1,000 today and earn an annual 5% gain, so $50. That $50 is added to the principal amount of your investment, and then next year, you earn a 5% gain on $1,050, so you earn $102.50. And so on ”¦
5. It’s about YOU!
The decision to take control of our financial life is up to you, because no one is going to do it for you.
The most important thing to understand about taking control of your money — and ultimately reaching financial independence — is to know that YOU are the only person who can make it happen. Of course there are others who will help you along the way, providing guidance and motivation — and in fact, that support is a key part of the process, because surrounding yourself with people who support you and whose goals are aligned with yours is the best way to keep yourself on track.
When you decide to make your financial well-being a priority, you’ll quickly discover that certain relationships and other aspects of life will empower you to reach your goals — and it’s important to hang on to them — because you’ll also discover that there are some things in your life that need to change.
Giving yourself the best chance at financial success means living a life that involves the right people, habits and behaviors. It’s about figuring out what really matters to you and your ultimate happiness, because no one can decide that — or accomplish it — except for you.
- Budgeting 101: How to create and stick to a budget that works for you
- How switching to an online bank can earn you up to 100x more on your savings
- Debt 101: Good debt vs. bad debt, dangers to avoid and how to protect yourself