Simple rules that can change your personal finances
Personal finance refers to how you manage your money and plan for your future. All of your financial decisions and activities have an effect on your financial health. I have written in my previous article for specific rules of thumb, such as “don’t buy a home loan that costs more than three years’ worth of income” or “you should always invest at least 20% of your income toward retirement.”
While many of these thump rules are time tested and helpful, it’s important to consider what we should be doing in general to help improve our financial health and habits. Here we discuss broad personal finance rules that can help get you on track to achieving specific financial goals.
Important is developing a personal budget and spending plan. Created on a monthly or an annual basis, a personal budget is an important financial tool because it can help you:
• Plan for expenses
• Reduce or eliminate expenses
• Save for future goals
• Spend wisely
• Plan for emergencies
• Prioritize spending and saving
Here, given below are the some of the important rules.
1. Avoid credit card debt
The first rule of personal finance is to never carry forward a credit card balance. Credit card borrowing rates are very high and paying those rates is an easy way to negatively compound your net worth. If you carry credit card debt for a long period of time, you’re not ready to invest your money in the markets.
2. Building credit score is important
The biggest expense over your lifetime will be interest costs on your mortgage, car loans and education loans. Having a high credit score can save and lowering your borrowing costs.
3. Earning Income is not the same as savings
There is a huge difference between earning 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.
4. Saving is more important than investing
Pay 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.
5. Live below your means, not within your means
Living within or above your means is how you end up going from pay check to pay check without every 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.
6. Understand your priorities look at where you spend money each month
You have to understand you’re 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 leftover on the things that truly matter to you.
7. Automate your bills
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.
8. Build up your liquid savings account
Your monthly budget should take into account, yet predictable expenses you’ll need to take care of on occasion. Weddings, vacations, car repairs and health issues 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.
9. Cover your insurable needs
People buy insurance because there will be a financial impact on their business or family if breadwinner health issues. The idea is to measure that impact in cost, and if possible, insure against it.
10. Save a little more each year
The trick to saving more money over time is to increase your savings rates every time you get a raise so you’ll never even notice you had more money to begin with. And the sooner you begin setting money aside, the less you end up realizing it never made it to your checking account to be spent in the first place.
11. Talk about money more often
Talk to your spouse about money. Ask others for help. Don’t allow financial problems to linger and get worse. Money is a topic that impacts almost every aspect of your life in some way.
12. Material purchases won’t make you happier in the long run
Buying stuff won’t make you happier or wealthier because true wealth is all of the stuff you don’t waste money on. Experiences give you a better knowledge and time spent with the people you love is one of the best investments you can make.
13. Know where you stand
Everyone should have a back-of-the-envelope idea of their true net worth. That means adding up all of your assets and subtracting any debts. This way you can set some general expectations about savings rates, market returns and portfolio growth to give yourself some idea in the future.
14. Taxes matter
Take advantage of as many tax breaks as you can and always understand your personal tax situation. The biggest lay-ups in this category include taking advantage of as many tax-deferred savings vehicles as humanly possible and keeping your trading to a minimum when investing in taxable accounts to avoid paying higher short term capital gains taxes.
15. Make more money
Too many people are stuck in the mind-set that there’s nothing they can do to get a better job, take on more responsibilities or earn higher pay. You must learn how to sell yourself, improve your skills and negotiate a higher income over time.
16. Don’t plan about retirement, but financial independence
The goal shouldn’t be about making it to a certain age so you can ride off into the sunset, but rather getting to the point where you don’t have to worry about money anymore. Becoming financially independent allows you to make decisions about how you spend your time on your own terms.
17. Don’t think about retirement, but financial independence
The goal shouldn’t be about making it to a certain age so you can ride off into the sunset, but rather getting to the point where you don’t have to worry about money anymore. Retirement is a concept that is still evolving and no one knows how they’ll feel once they reach that age. Becoming financially independent allows you to make decisions about how you spend your time on your own terms.