Not everyone has the guidance or experience to manage his or her money well, especially from a young age. While most of us pick up some good habits along the way, getting off to a good start is so important for securing your long-term financial future.
Here are some of the golden rules for personal finance that everyone needs to know.
1. Don’t spend more than you make.
Living within your means helps you escape the ‘rat race’ – the endless cycle that sees you working, overspending, paying off debt (and interest) and then working some more! By spending less than you earn, you can divert some money towards helping fund your future and getting even further ahead.
2. Always have an emergency fund.
Saving for a rainy day is so important because it can cushion the blow of life’s unexpected surprises. By having six to eight months’ of net income set aside, you’ll be able to financially handle some of the more challenging situations that can come up, like health issues, the loss of a job, or other unexpected household expenses. This way, you’ll have a much better chance of still being on track to achieve your financial goals without having to make a big adjustment to your lifestyle because of money concerns.
3. Pay yourself first.
It’s such a simple concept – setting aside a portion of your income in a savings or investment account before doing anything else. That’s before buying groceries, new shoes, bills, nights out – before anything. All of the other important stuff will still get paid, and if you end up running low, the things that you’ll sacrifice will be the things you probably don’t really need. Your savings will continue to grow and your future self will thank you for it!
4. Pay off highest interest debt.
The smartest way to pay off debt (ignoring the psychological benefits of other strategies) is to get rid of high interest debt first. Paying off the debt with the highest interest rate will inevitability keep the overall interest that you pay to a minimum.
5. Prioritise needs, wants, and savings.
Understand the things you need (such as food, shelter, education) and separate them from the wants in your life. Ensure you’re putting enough aside for saving to meet your goals, and then the rest can be for your wants. By understanding and isolating out your wants, you’ll be more in control of ensuring you live within your means.
6. View retirement as a privilege you earn and save for – not a right.
It can be difficult to think so far in advance, but if you understand that the standard of living you have when you retire can be greatly influenced by the choices you make early in life, you can really make a big difference with some small adjustments. To ensure you have the quality of life you want, you have to earn it by saving and putting away for retirement – it’s as simple as that really.
7. Start saving as early as possible
The magic of compound interest can make a huge impact if you start saving early. Well, it’s not really magic – it’s quite basic but many people find it very difficult to start putting money away. It’s understandable – when you’re young the last thing you want to think about is boring stuff like saving money for your future, but if you can even just start small and start early, it will give you the most opportunity for growth.
8. Know the difference between assets and liabilities.
A simple principle that’s mentioned in many personal finance books (e.g. Rich Dad, Poor Dad) is the difference between assets and liabilities, and how they can have a significant impact on your future wealth. Assets are things you own that have value, and liabilities are what you owe. If you select the right assets (for example, a rental property), then the asset will redirect cash flow back to you as an income stream. By diverting more of your income towards cash-generating assets, you will start a cycle of growth that allows you to invest more and further build your wealth.
9. Keep your housing costs to under 30% of your income.
As a general rule of thumb, keeping the costs of your home (i.e. mortgage payments, rent, etc.) below 30% of your net income will ensure you don’t get in a situation where you may find it difficult to make the payments. For example, the loss of a job, major changes in the housing market or interest rate fluctuations can have a significant impact – especially if you’re already struggling to make the mortgage payments.
10. Avoid ever paying credit card interest.
Credit card interest rates are some of the highest you can come across, and so easy to get caught up in. If you follow the other golden rules like living within your means and having an emergency fund, you really shouldn’t need to ever have credit card debt that you can’t pay before the interest is charged. The slow outflow of your money via credit card interest will seriously make it more difficult for you to get ahead and get out of debt.
By following these rules, and learning more along the way, you’ll set a good foundation for your financial security.