3 Basic Rules of Money
They call it personal finance because each and every person’s money story is unique to them. The “best” money advice varies depending on who you are and who you ask. Still, there are some basic guidelines that almost all money experts will agree on.
Three Fundamentals of Financial Success
At the risk of stating the obvious, here are the three basic rules of money.
Stay off the hook. Avoid accumulating debt, particularly high-interest debt.
Focus on cash flow. It’s not about what you make, it’s about what you keep.
Keep a cushion. Put something away for a rainy day (or many, many rainy days).
Over time, your ability to do these three things will determine your financial success.
Keep your debt obligations to a minimum
The most popular types of debt are mortgages, student loans, car payments, and credit cards. At times, debt is necessary to do what you need to do in life. Don’t beat yourself up about it. At the same time, it’s important to realize that not every dollar of debt carries the same weight.
The best book on getting out of debt and establishing a solid financial foundation is Dave Ramsey’s Total Money Makeover. I highly recommend this book for anyone searching for security in their financial situation. Dave Ramsey is the man when it comes to crushing debt.
Make more money and spend less money
If you make $250,000 per year but you spend $250,001 then what is it all really worth?
One of the most financially debilitating mistakes that people make in life is to allow their spending habits to grow with their income. A phenomenon that is commonly known as “lifestyle creep”. The root of the problem is two-fold.
Most people do not have a plan for their money before they make it. Without a designated purpose, those dollars get bored in your bank account and inevitably find new and exciting ways to be spent inefficiently.
A lack of visibility will kill you slowly. We all like to believe that we know how we spend our hard-earned cash, but few (if any) people can truly account for every dollar they have spent at the end of the month. Why? Because we don’t track our spending.
Spreadsheets and notebooks are cool, but they never worked for me. I need something automatic. So, I synced up my bank accounts with MINT. It’s not perfect, but it’s automated and it’s free 😍. This way I can check up on my spending habits weekly (or daily) to see how my cashflow is doing.
Build an emergency saving fund
As the saying goes, “life happens”.
Nothing can derail your financial plans like quite like surprise life events. If you are living close to the edge, spending every dollar you make as soon as it comes in, you are rolling the dice on your financial future! All it takes is an interruption of your income or a spike in your expenses to send it all crashing down.
So what should you do?
Personally, I aim to have at least 6 months of expenses saved up just in case. This may or may not seem like a lot for you.
If you are trying to decide how much you need to keep on reserve ask yourself these three questions;
How much do I spend each month?
How reliable is my income?
How many people are depending on my money?
If your answers to these questions make you nervous, aim for a four to six-month cash cushion. If you’re still in school with no kids and only minor expenses outside of rent - start with 1 month.
If your current emergency fund is nonexistent, you should aim to save at least $1,000. That way, you can buy yourself some time if something bad were to happen. Then, over time you can build up to a more substantial cash cushion to make sure you’re ready for whatever.
Always remember… personal finance is, well, personal. The best advice for you might not be the best advice for your friends. BUT, if you stick to these three rules of money I have no doubt that you will be on the right path.