Personal finance sounds very complicated but it is not. It is actually so simple that it can be broken down into 10 sentences:
Spend less than you earn.
This is the most important lesson anybody can learn in personal finance which is why it is number one. Spending less than you earn sounds so simple on paper yet most people find themselves living paycheck to paycheck or buried in debt.
Take a step back and look at your monthly spending habits to separate wants from needs. Evaluate your routines and look at where you can begin to cut cost.
This will save you stress, help eliminate your debt, increase your retirement savings, and allow you to enjoy life more.
The best time to start was yesterday, the worst time to start is tomorrow.
Whether it be investing, paying down debt, or simply getting your finances in order, it is always better to start today than to never start at all. The earlier you can start setting good financial habits, the faster you can retire.
The millennial generation has the most to gain from starting early as we have time on our side. The difference between starting at the age of 22 and 30 can be the difference between $500,000 and $1,000,000. Which amount would you rather? Take advantage of the power of compounding and begin successful habits today.
Nobody can help you except yourself.
People can give you the best advice in the world but you need to act on it. There is a wealth of information available online for free about taking control of your finances but without action nothing will be achieved. Focusing on a distant goal like retirement can be a daunting task for many people so it is better to break it down into yearly or monthly goals that set you up for future success.
Stop trying to keep up with the Joneses.
Keeping up with the Joneses will keep you living the paycheck to paycheck lifestyle. Sometimes it is to not give in to the pressures of being with friends at every single event and to remind yourself of your goals and where you want to head in life. Nobody will help you out except for yourself so it is important to pay yourself first before others.
One thing I personally like to do is set a budgeted amount for social activities a month. Once that limit is reached I try suggesting free activities we can do. These can be just as much fun and are often something new to try.
Pay down the highest interest bearing debt first.
Today, millennials are graduating college with an average of two student loans and over $35,000 in debt. On top of this, many have car payments and credit card debt. Debt is a burden and a major stressor for many people at all stages through life.
The fastest, and most efficient, way to pay down debt is to start with the highest interest rate. This can save you hundreds or thousands of interest expense that can be applied to other debt payments. Don’t make the mistake of simply doing what is expected, be proactive and start destroying your debt today.
Build multiple streams of income.
Due to the increased debt burden, stagnant wages, and rising cost of living, the average person is now faced with a dilemma: Live the paycheck to paycheck life or increase their income to afford a desired standard of living.
Building multiple streams of income is important to exiting the rat trap and securing financial freedom. Begin by using additional income to pay off any debts and then use any disposable income to invest in a 401(k) with an employer’s match, build passive income, or fund other retirement saving vehicles.
Life will throw you curve balls so have an emergency plan.
Rather than having an emergency fund I thought it was important to say emergency plan. Having an emergency fund is a great asset for those that are not great at handling their money or do not know how to utilize their credit card properly. These should normally be 3-6 months worth of expenses.
However, there is an opportunity cost that is lost by having a lot of money sitting in cash rather than working for you. Some people rather have a low amount of cash in their bank account so they can invest their money and float the unexpected expenses on their rewards credit card until additional funds are secured.
Whatever approach you take, make sure you have a plan for the unexpected.
“Personal Finance is 20% knowledge 80% behavior” – Dave Ramsey
This is probably my favorite personal finance quote. Financial freedom cannot be achieved without these two elements but it is ultimately up to your behavior and commitment that will help you achieve your goals.
Income does not determine wealth.
It does not matter if your salary is $50,000 or $100,000; what matters is what you do with that money. A person may make more money than you but if they spend all their money on pleasing their friends and enjoying the luxuries of life they are most likely living paycheck to paycheck.
While a higher income certainly helps in attaining goals faster, the amount you save and invest will ultimately determine what your wealth is, not your income.
Do everything in moderation.
Most importantly, and something I heavily believe in, is to enjoy life at all stages. Many of the tips on this list have a lot to do with saving money and putting everything into a retirement account. This often comes across as making your life a boring spectacle where you go to work, come home, sleep, and repeat.
This is the furthest thing from the truth but everything needs to be done in moderation. If travelling sounds like a great idea then by all means go for it, but do what I do and set up a budget account for it. You do not need to take the enjoyment out of life to get your finances on track, you just need to remember your goals and stay committed.
Readers, what are other sentences you would add to this list? What points do you agree or disagree with? How has this advice ever helped somebody you knew?