When it comes to personal finances there are so many opinions that it can be hard to decide who to listen to. However, even with these varying levels of opinions there are also some personal finance rules that are non-negotiable.
Remember, when it comes to your money, it's just simple math. I'm a big believer in the basic personal finance equation: Income – Expenses = Savings. That's it. There's nothing else to it.
If you don't have any money left over each month, it's either because you spend too much or don't earn enough.
With that being said, here are my personal finance rules that everyone should live by.
Rule #1: Keep Your Finances Organized
This is rule number one because we can't even have a discussion about your money if you don't know the basics of how much is coming in, and how much is going out.
While you don’t have to have a full blown, down to the last detail budget you do need to be aware of your personal finance habits. In almost every scenario of people getting themselves into debt, most have no idea how much they are spending or where their money is going.
By getting organized, you can start to change things. When you start to watch how you’re spending your money, you can start to make sure you’re hitting your savings goals each and every time (heck, you can start to create goals in general).
So how do you get financially organized? There are a lot of ways, but the simplest way is to just setup an account on Personal Capital and link your bank accounts and credit cards. Personal Capital is great because it's free, it connects with most banks, and it will automatically track your income and expenses. All you need to do is look at the reports!
Rule #2: Spend Less Than You Earn
If you want to be financially successful, then you must spend less than you earn.
As obvious as this sounds, it’s something that many people struggle with. How many people do you know who have to live on credit cards? Probably too many.
But here's the catch – a lot of people get caught up on “spending less”. They seem to forget the part about “earn”. You can always earn more and the equation above still works. And don't dismiss this key aspect.
The amount of money you can cut out from your budget will always have a lower limit. You can't avoid food costs and rent. They will always exist. However, there is no upper limit on the amount you can earn. It just takes time and effort.
You need to engrain the habit of living below your means from a young age. If you can’t tackle this then there’s no hope for your finances at all.
Rule #3: Save And Invest For The Future
Look, at some point in time, you will no longer be able to earn income. It will happen. You can't avoid it.
For some, it will be a matter of age. You will get too old and frail to work. For others, they might encounter an illness or disability that could prevent them from working.
And for anyone, there could be unexpected events throughout life that will prevent you from earning an income (e.g. lose your job, get in an accident, etc.).
While there are many different views on how you should invest your money and what type of returns you’re going to get, it’s common advice to start saving and investing for retirement as soon as you can.
Everyone needs to have an emergency fund, and everyone needs to save and invest for the future. You can get student loans for college, but there are no loans to get you through retirement.
The earlier you start investing, the less money you need to save, thanks to compound interest. That’s a pretty powerful reason to get started.
Rule #4: Eliminate Debt
I hate the discussion around good debt and bad debt. Debt is simply debt – and it means you owe someone money in exchange for something (usually interest and collateral). In the big picture, you need to eliminate it, and the faster you do it, the more financially successful you'll be.
Debt is a drain to your monthly cash flow and is an unnecessary source of stress for most people. Going back to that personal finance equation, debt is an expense. And for most people, it is a much higher expense that it needs to be (ideally it should be $0).
Start by eliminating high interest debt like credit cards, personal loans, and car loans. After you get rid of that you concentrate on whittling away your student loans. Once you have this debt gone you’ll have the freedom of redirecting this money to your savings goals.
Looking for a short term solution? See if you can lower your debt payments by refinancing the debt. We recommend Credible for both student loans and private loans because they allow you to comparison shop different offers to get the best rate.
Rule #5: Set Goals For Yourself
If you don’t know where you’re going, you’ll never reach your destination. How true is that?!
If you really want to make your finances the best they can possibly be, you need to set goals that matter to you. Sit down and set one or two big goals for the year and then break them down into doable steps.
We talked about this recently in How To Pay Off $10,000 In Debt In One Year. The strategy is to work backwards. Start with $10,000, and divide by 12. Now you know you need to address $833 per month. Then go look at the personal finance equation and decide if you're going to boost your income or reduce your expenses to achieve that savings goal.
Remember to make goals that are important to you and your family. We all have different visions and values so no two people’s goals will be the same. And realize that goals can change. Life changes. The world changes. What might be a goal today could change next year.
It's okay to be flexible, but it is essential to be accountable. Write down your goals. Post them in a visible location. Share them with others. It's okay to admit you're not a money expert and you're working to improve your financial life.
These aren’t ground breaking personal finance rules. In fact they’re pretty basic. But personal finance is pretty basic. There will always be disagreeing views on subjects like investing and debt. There will always be new tools and tactics.
However, all you need to do is strip personal finance down to the basics to see success. The rest is just minutiae.