5 Personal Finance Rules to Live By
If you’re one of the thousands of people looking for money advice because you’re sick of living paycheck to paycheck and drowning in debt, you know finding solutions can be overwhelming. When you search for personal finance advice, there is an abundance of information out there and can be a lot to take in, hard to follow, and contradictory advice.
So, today, I thought I’d help simplify personal finance. And, yes it really can be simple! Most of us just weren’t taught about money when we were young, but a few key money principles will totally change your life and reshape your financial future. Want to know what they are? I can’t wait to tell you! Let’s get into it together:
5 Personal Finance Rules to Live By
Why is it Important to Manage Your Money Well?
First of all, what’s the point of learning about personal finance? A lot of our formal education centers around income, not management of that income. But, the management is the hardest part! People spend more than they make and struggle to work up a savings comfortable enough to live on in their future. This leads to stress and hopelessness. In fact, 65% of people say that money is a significant source of anxiety.
So, obviously money management is not only important for your wallet, but your mental health too. Here are reasons to get your money under control and live by these 5 money principles:
Reduces stress and anxiety.
Develops a safety net for big repairs and emergencies.
Increases margin in your budget to pay bills on time.
Makes vacations possible and actually enjoyable.
Allows for investments and preparation for future wealth.
Permits guilt-free fun spending.
Reduces anxiety around money as you get married or start a family.
Supports your home-buying or real estate goals.
Gives you confidence to pursue your dreams.
Develops a sense of contentment and satisfaction.
Contributes to a better outlook, deeper joy, and a greater sense of satisfaction.
5 Rules for Personal Finance Success
Rule One: Always create a monthly budget and stick to it.
The number one rule of money management is having a budget. All a budget is, is a money game plan! A good budget gives every dollar a home before it even hits your bank account. You know exactly how you’ll spend money, so nothing spirals out of control! Even if you’re not a big spender, living without a budget can easily lead you off the path and act without purpose.
If you have kids, think of it like this: You buy a bunch of snacks that should be plenty to last them the whole month. However, with no limits to how much they can have at a time, things quickly go wrong.
Soon, one snack turns to two, and two snacks turns to three. Day after day this happens until suddenly, there are no more snacks and it’s only half way through the month! Sound familiar with your money? And, the kids can’t seem to understand where they went either? “It didn’t feel like I was eating too much?”
In this scenario, you’d tell your kiddos that they were eating their snacks at a pretty fast pace, especially right at the beginning of the month. Now, there are none leftover . . . Does this sound familiar? Do you feel like SO much money was poured in on payday, and now despite only making small purchases and paying bills, the money is gone?
There’s a solution.
The problem is not always that you make too little. Just like the problem with the kids was not that they had too few snacks. They had plenty, but didn’t spread them out well. If you pace your kids to have one snack in the morning and one snack in the evening, they won’t run out! And, you know this for a fact. It’s not just a feeling. Of course, you should do the same with your money.
Each month, sit down and craft a new budget. Every month brings it’s own unique spending needs! Make sure every dollar is going somewhere and that you track every bit of spending a long the way. When you do, you’ll be surprised to see your spending habits revealed! If you know you have an annual bill due, an upcoming repair, or a big Costco haul, make sure that it’s in there as well.
Then, it’s time to follow it. This can be tricky too, but with discipline and accountability you have a better chance of success! Try it for a couple months by taking cash out of your account and using “the envelope system” to categorize all your money. If you still struggle to stay on budget, let’s do a free chat. There may be some deeper issues that a Financial Coach can help address with you!
Rule Two: Eliminate all consumer debt and NEVER GO BACK!
When you’re in debt, you’ll really never find a sense of satisfaction and peace around your finances. You’re ALWAYS thinking about what you “owe,” which keeps you in the past and prevents both mentally and monetarily from moving on and achieving more. When we are in debt and are on our loan terms, you have a smaller ability to live on your own terms.
The other thing about debt is that it has us chasing the wrong score board. Rather than worrying about your credit score, we should be looking at our net worth!
Attack your debt with everything you’ve got, and be free from all collectors! And I mean ALL of them! Auto Loans, Student Loans, Credit Card Debt, you name it. You’ll breathe such a sigh of relief, and suddenly your account balances will go up and up (say goodbye that minimum payment!). Needless to say, once you're out of debt, NEVER GO BACK. EVER. Seriously.
And, before you say, “Pff, I have so much debt, there’s no way I could ever get out,” Stop right there! I know you can. I’ve seen people tackle HUGE debts through my financial coaching. I’m talking over $100,000 worth! With the right plan and motivation, you can dig yourself out of any financial crisis. If you’re feeling lost or a sense of hopelessness with your money, please reach out and we can walk through this journey together!
Rule Three: Don’t make your emergency fund an investment.
An emergency fund is available extra money that you can use, well, in an emergency! I recommend saving 6 months of your living expenses in your emergency fund. I get questions all the time about where to put that much cash. My answer is always . . . in your bank savings account.
I know, I know, you want that sustainable pile up of cash to generate interest or some type of ROI, but investing your emergency fund is NOT a good idea. This money is supposed to be accessible and secure. When you invest your finances, the balance has peaks and valleys. We want zero risk associated with your emergency fund! HOWEVER, before I go any further, take a look at two different accounts here. A Money Market account or a High Yield Savings Account. Most banks offer these types of accounts and they do earn more interest than your standard bank savings without being risk averse like a mutual fund.
Something else to keep in mind is that pulling money out of an investment account isn’t as easy as transferring money out of your savings. You’ll likely have to pay taxes and processing takes more time. When you’re in an emergency fund, there’s no time to mess around! In conclusion, definitely keep your emergency fund in either a savings, money market, or high yield savings. This is the one lump some of money we don’t want any risk involved.
Rule Four: Rent while saving for a strong down payment—you’re not throwing money away!
There’s a trendy saying that when you’re renting you’re “throwing money away,” because your monthly rent payment isn’t going towards a real estate investment. People also like to point out how a monthly mortgage and rent payment is about the same. Although your rent isn’t going towards earning equity and a mortgage payment can technically be similar to a rent payment, there is more to this than what is seen on the outside.
Rather than looking at renting like “throwing money away”, you need to consider looking at it like your preparation period before buying a home. Rent gives you more flexibility to move freely with shorter term living circumstances, takes the pressure off of you for any maintenance, and you have WAY less expensive insurance and no property taxes. On top of that, many apartment complexes offer the rent utilities within the bill so it’s less bills you have to hassle with. Since you’re not bogged down by the commitment of a mortgage and all separate utility companies, you can change your plans much more quickly in response to a financial need.
Also, despite the price of a mortgage and rent being somewhat similar, it is NOT cheaper to buy. When you buy a house you are responsible for taxes, insurance, and home repairs. That’s when you’re IN the home. Don’t forget the tens of thousands you need for a down payment, realtor fees, inspection costs, earnest money, appraisal fees, and closing costs. You don’t need tens of thousands of dollars just to get into a renting situation. Renting allows you to save more money in preparation for the home buying process. It’s okay to do it for a season while you collect up a good chunk of money!
Rule Five: Pause retirement and long term investments while you set your foundation.
You may be worried about retirement and long term investments already, but setting a good foundation before you start investing is KEY in a solid financial future. I see too often that people are pulling from their retirement accounts just to make ends meet or to pay off their debt. It doesn’t make sense to put money towards 30 years in the future when you haven’t paid off what happened yesterday. Free up your monthly income from those minimum payments and use THAT cash to put towards your future and not your past!
I don't want to be in this stage for long. I want you to be able to save and invest! Get fired up, pay off that debt, and save a solid emergency fund FAST. I’ve seen the amount of money used towards debt payments being put towards investments instead and it is IMPACTFUL! It increases peoples retirement potential by hundreds of thousands of dollars! So, the sooner you get back to investing the better. More time on our side means more compound interest! Then, when it’s time to retire and live the good life, you’re not stressing about money again.
Investing is you earning interest. Your debt is you paying interest. That’s the big difference!
Do you live by any of these 5 principles?
I want you to win with your money. When you have your finances under control both your present and future life looks bright! Being in a strong financial position gives you the freedom to live out your life the way YOU want to. Not how you have to. Follow these 5 steps for money management and keep checking out the blog for more financial advice!
Of course, if you feel overwhelmed or lost by anything on this list, please reach out. I offer a free consultation to walk through where you’re at, where you want to go, and discuss the steps to get there. Financial Coaching is not about selling you financial products, but to serve as a guide and co-pilot as you drive towards your financial goals!
Action Steps:
If you haven’t before, create a budget. Use an app like EveryDollar if you want something super user-friendly. Just make sure EVERY DOLLAR is accounted for.
What are you willing to sacrifice (temporarily) to pay off debt fast?
What changes do you need to make to your current situation in order to create a better future for you and your finances?
Define purpose to your money. Have savings goals for your emergency fund AND beyond so that you have more drive and motivation to keep money in your pocket and not let it fly away!
