The Four Golden Rules Of Personal Finance
Many successful people have mentors to guide them in learning
the skills that lead to achievement, and I'll do my best to
offer you some critical personal finance perspectives. They say
that life is a school where you learn the lesson after the test.
The same thing applies to money, but you can't go back in time
to fix catastrophic financial mistakes that you have made over
time. As long as you are alive, you are a player on the field of
the money-game, and you need to know the basic rules before you
get tagged by the experienced players.
Rule #1: To earn money from money. The only way to escape
becoming a wage slave for the rest of your life is to set aside
savings. The profit on your savings can be used to increase your
lifestyle spending, reduce the number of years until you retire,
or allow you to actually have any retirement at all. How are you
doing so far toward saving and getting it to earn money for you?
Every dollar that you spend eliminates its ability to earn money
for you in the future. I am not recommending that you stop
eating at restaurants and going to movies, I am recommending
that you use some common sense, like looking at your four
biggest expenses over the last few months and aggressively
finding a way to reduce them.
The biggest obstacle for the first rule is personal debt of any
kind (other than a mortgage for your home) or a lease of any
kind. Every personal debt that you incur reduces your net worth
which could have been working for you over your life time.
Acquiring personal debt is exactly like putting a large hole in
your wallet. In the money-game, a huge transfer of wealth occurs
between the 'Haves' and the 'Have-Nots' over the words, "I can
afford that monthly payment." Here is a hint: the "Have-Nots"
are the ones who make that statement. So please don't ever look
at whether you can afford a monthly payment to make a purchase;
pay in cash after you've saved for the item. [Everything that
you buy with a 0%-interest payment plan must be over-priced.
Behind the scenes, your payment contract is sold to a lender
with an interest rate, and retailers don't do this without
building-in an acceptable profit for themselves. Ask retailers
how much the item will cost if you pay in full, and you could
get a lower price.]
Rule #2 Always keep your finances under control. The first step
in losing financial control and spiraling into debt and money
problems is simply not dealing with personal finances. Prepare
for catastrophic financial accidents with health, life,
disability, and auto insurance. Plan and save before you buy
something. Create a balance sheet for yourself at least once a
year to see how you are progressing. Pay every bill on time, or
contact the creditor to tell them what is going on and make a
partial payment. If you are temporarily unable to handle any of
this, ask for some help immediately and find someone trustworthy
who will do this for you.
The most common source of financial trouble is a trauma in your
life. This can be a health problem (large expenses or unable to
work), an emotional problem (divorce or loss of loved one), or a
financial problem (losing a job, cut in pay, relocation,
unexpected expenses). Whichever the source may be, it leads to
three emotional problems: the first is denial, the second is
being overwhelmed, and the third is hopelessness. Denial causes
people to not open their mail and continue spending as usual,
and being overwhelmed paralyzes people from getting assistance
and dealing with the situation. For example, if you just lost a
loved one, balancing your checkbook and paying bills is not high
in your priorities. Unfortunately, tiny amounts of debt grow
with interest and penalties into seemingly insurmountable
mountains of debt; leaving you with loathsome options such as
bankruptcy, poor credit, declining lifestyle spending, and added
stress that you bring to relationships and work.
Rule #3 Pay attention to the finances of the people with whom
you spend the most time. Whether they are relatives, friends, or
co-workers, these people have the most impact on your financial
life. Do they consistently follow the first two rules of the
money game? Do they earn about the same money as you? If the
answer to either of those is "no", then I recommend that you
start spending a little less time with them; and this is why. If
they don't consistently follow the first two rules, it is
unlikely that you will either. You unconsciously model the
people around you, and the more people you are exposed to that
don't follow the first two rules, the more likely that you will
unwittingly follow them. No one thinks they are 'trying to keep
up with the Joneses', but we all do it to some extent, and this
is the mechanism. On the other hand, if they earn a lot more
money than you, you may rack up a lot of debt trying to keep up
with them (meeting them at their favorite expensive restaurant,
joining them for another expensive vacation, buying a new car
because yours is the junker among all of your friends, etc.) On
the other hand, if most of your friends earn a lot less than
you, you will turn into the group's banker. For example, you'll
find yourself in the pattern of putting your credit card down to
pay for dinner and they'll all say they'll pay you back later,
but 50% of them never do; and they don't mind taking advantage
of you because, after all, you earn a lot more than they do. Or,
you and your friends need to pay a deposit for renting a house
and they expect you to write the checks because you have the
money available and they do not.
The neighborhood that you live in also creates financial
pressure to violate the first two financial goals. Your
neighbors are likely to become friends (and I've already gone
over this), but they also influence the size of your home,
extent of your landscaping, price of furniture, and the size of
your TV. So pay very close attention to the finances of your
neighbors - if you don't like how they are measuring up for
first two rules, move somewhere more in alignment with your
financial goals. If your family and friends, don't measure up
financially, find some additional people to spend time with that
have financial habits that you'd like to emulate and learn from.
I have friends with a wide range of income, but it is much more
difficult to follow the first two money rules when I am with the
extremes from my own income. You'll just find it easier to reach
the next rule when the peer group that you hang out with aligns
closer to your economic level.
Rule #4 Accelerate the other three rules: Add to your savings by
increasing your income through advancing your career. It doesn't
matter whether you enjoy it; it is a means to an end - with the
end being progress toward the fulfillment of rule #1. Increase
the amount that you save by aggressively lowering four of your
highest expenses. Start spending time with people that talk
about investing money and are systematically building their
wealth the fastest. The combination of all four of these rules
will hopefully offer a next-step for you to take today to start
getting more 'wins' in the money-game.