The most important rule of personal finance? Spend less than you earn.
A while back, I was asked to give an hourlong presentation where I talked about my key principles of personal finance. I chose to give a presentation where each slide was available for about a minute with one simple rule on each slide, giving me a minute to discuss that rule. Thus, I ended up coming up with 60 short and simple rules for personal finance.
I would happily share the presentation with you, but I’m not sure of the copyright nature of some of the images used. Instead, I’m just going to present the 60 rules, along with my quick personal thoughts on each rule.
Of course, not everyone will be able to follow each rule all of the time. However, the more you follow these “rules,” the better your financial situation will become.
#1 – Spend less than you earn
If there is a single fundamental rule of personal finance, it’s this. You have to spend less than you earn and put away that difference for the future so that you can still survive and thrive when you’re older and don’t have the opportunities and energy of today. Without your earnings being greater than your expenses, you simply cannot achieve big financial goals without some sort of miracle – and you should never bet your future on a miracle.
#2 – Keep everything as simple as possible
The more credit cards you have, the more chances you have for identity theft and the more chances you have to miss a payment. The more investment accounts you have, the less attention you can give to each one and the more likely it is that you’ll miss a big problem. The more accounts and investments and bills that you have, the more time and energy you have to spend to stay on top of it all and the more likely it is that you’re going to make an error.
Simplify. Cancel some of those cards. Roll over some of those investments. Consolidate some of those debts.
#3 – Don’t ever let your “future self” take care of your current situation
Do you ever tell yourself that it’s okay to make a bad spending decision right now because you’ll earn more money down the road? That’s a giant mistake, one you’ll almost always regret for a long, long time. Sure, your future self might have more income, but it’s also fairly likely that your future self might have less income and you’ll find yourself in a really bad situation. Even if your future self is doing well, there are probably going to be other big expenses that you’ll want to deal with at that time, like buying a house.
#4 – Focus first on building an emergency fund
If you do not have a cash emergency fund just sitting in a savings account at a local bank somewhere, this should be your number one priority. Cash is king for solving all of the problems that life throws at you. Unlike credit, cash is available in situations of credit problems or of identity theft. You can start building an emergency fund by setting up an automatic weekly or monthly transfer from your checking account to your savings, then leaving the savings alone until an emergency beckons.
#5 – Focus second on eliminating high-interest debt
If you have an emergency fund in hand, you should next focus on eliminating your high-interest debt. Set up a simple debt repayment plan by organizing your debts by interest rate, then attempt to make a double payment (or more) on whatever debt has the highest interest rate. Make that double payment every month, then when that debt is gone, add the total amount of that payment to the payment you’re making on the next debt on the list. Keep repeating until your high-interest debts are gone.
#6 – Focus third on saving for retirement
Once your high interest debts are out of the way, start saving for retirement. If you haven’t already, open up a 401(k) plan at work and start contributing to that plan. If you don’t have a 401(k) at work, set up your own Roth IRA account, which you can do through virtually any investment house (I use
Vanguard). Contributing a few percent of your pay may sound painful, but it will actually end up being a much smaller burden than you expect, one that’s lifted up by the pleasure of knowing that you’re securing your retirement.
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