Here are the 9 most important personal finance rules that a large majority of Americans don’t care about and rarely follow:
Paying oneself first
Giving your wants a higher priority than your savings/investments may although give you immediate satisfaction, but leave you penniless at the end of every month. This is the reason why majority of financial advisers suggest paying oneself first, implying that you must set aside a specific amount of money after every payday for your savings/investments before allocating any to your necessary/desired expenses.
So, take out that amount and put it into a dedicated savings account right away. Use only the leftover amount for meeting your general monthly expenses.
Waiting 24 hours prior to a big purchase
Many financial experts recommend practicing a 24-hour rule before making any big purchase. This is all the more applicable to shopaholics. As evident, what it means is that you must force yourself to wait for at least 24 hours before making any big purchase, giving you ample time to reconsider your decision. Often, such thinking time helps people in talking themselves out of such purchases, sometimes even forgetting them altogether! You can push this rule even further and make your wait one week-long if you think it may help.
Diversifying one’s investments
There’s an old saying that you must never put all your eggs in one basket! The key to becoming successful in the personal finance game is by diversifying your investments.
Normally, it is asset allocation or the decision between bonds and stocks, foreign and domestic investments etc. that come to mind whenever we talk about diversification. However, you must think of it at a broader level, taking into account all your income streams.
Living below one’s means
Think about it – no matter how much money you make each month, it’s always easy to spend every last bit of it.
However, have you ever thought what may have happened if you had spent less?
What if you had stuck to your guns and saved at least a small percentage of your income at every stage of your working life; no matter what?
It isn’t easy to live below one’s means, primarily because it forces you to make certain compromises every day. Nevertheless, following such rule is critical to the success of any personal financial plan, and can go a long way in helping you lead a financially responsible life. Once you master the art of spending lesser than your earnings, you’ll always find more and more money to save and invest.
This is by far the most significant personal finance rule that determines several aspects of your financial health. When it comes to money matters and tasks such as retirement planning, budget creation etc., you must complete them at the earliest possible, without any delays. In fact that’s the only way they’ll be most helpful.
Furthermore, you must confront your financial situations and issues upfront, as if your life depended on it. If you don’t, you may soon find yourself losing out in the personal finance game.
It’s probably not affordable if you can’t avoid financing it
Although perceived as a fairly conservative personal finance rule, this one can deliver excellent results. If there’s something you can’t presently buy in cash, there’s a high likelihood that you’re in no position to afford it as well.
Think about not opting for car finance and instead saving up all that money for your home renovation. You’d be able to save so much each month if you didn’t have to pay hefty sums in loan repayments, credit card payments and interest.
Even though this rule may seem difficult to implement at first, it can leave you with plenty of disposable income if you apply it diligently. So, the next time you feel the need of financing something, ask yourself if you can buy it cash down instead. If not, avoid it altogether.
Automating investments and general finances
Although majority of people feel all gung-ho about investments and personal finances initially, they rarely act upon their intentions. This is the main reason why financial advisers recommend automating investments and finances.
Ideally, you must automate your income, expenditures and savings to the maximum extent possible. Doing so can not only help you in paying yourself first, but also leverage the automation’s power, for meeting your other important monetary obligations.
Differentiating between wants and needs
Before you go ahead and buy something, you must always ask yourself whether you truly need it or not. More often than not, we can borrow something similar and avoid incurring a hefty expenditure; or can find something similar at home. Some other important questions you must ask yourself before any purchase are:
- Have I shopped around for cheaper alternatives?
- Can this purchase be delayed?
- Can I buy a used item instead?
- Is there some way I can make it on my own?
You can save lots of money and avoid many unwanted purchases by asking yourself these questions more and more often.
Treating retirement savings like a regular monthly expenses
Considering that we’ll all retire one day, why is it that so many of us keep delaying their retirement savings? There’s no way you’ll have all that money available upon your retirement, if you don’t start saving now. The keyword here is ‘now’ and you must start right away, no matter how young or old you are.
In case your employer offers some job-sponsored plan wherein he matches the amount contributed by you, that’d be the best way to start. By opting to save a certain amount from your paycheck each month, and making your employer contribute an equal amount, you’ll be slowly building a nest egg that’ll come in pretty handy during your retirement years.
Americans love to consume more and more, and bury themselves in piles of debt. It’s high time that we start thinking and put ourselves on road to financial recovery. Abiding by these rules can help us exactly do that.