20 Rules of Personal Finance
There is a difference between personal finance and investing. Only when you have your personal finances in order can you start thinking about saving and investing for the future. The basic principle is to spend less than you earn! A blog today by Ben Carlson talks about the 20 rules of personal finance, and it's one of his most-viewed blogs of the year. Here are my favourite of the 20 rules, along with my comments: 1. Salary is not the same as savings. Your net worth is more important than how much money you make. It’s amazing how many people don’t realize this simple truth. Having a high salary does not automatically make you rich; having a low salary does not automatically make you poor. All that matters is how much you save out of your salary.
GL: I can't tell you how important this is. Your wealth is really your net worth. That is, the value of all your assets (house, cash in the bank, investments, pensions etc) less the value of all your debt (mortgage, credit card, car loan etc). I say this all the time...wealth has nothing to do with what you earn, and everything to do with what you do with what you earn. I don't think this could be more true than here in Cayman. There are great deal of people earning a lot of money but I often see low or even falling net worth, because everything is going right back out the door, or because more debt is being added to the pile.
2. Saving is more important than investing. Pay yourself first is such simple advice, but so few people do this. The best investment decision you can make it to set a high savings rate because it gives you a huge margin of safety in life.
GL: YES YES YES. I love the look on people's faces when I tell them to think of saving and investing as 'paying themselves first'. It can be such an aha moment - the realisation that saving is not something boring and painful, but in fact, the most powerful and amazing thing you can ever do for yourself.
3. If you want to understand your priorities look at where you spend money each month. You have to understand your spending habits if you ever wish to gain control of your finances. The goal is to spend money on things that are important to you but cut back everywhere else. And if you pay yourself first you don’t have to worry about budgeting, you just spend whatever’s left over.
GL: I have written about 'budgeting' before. It feels just like being on a diet. Restrictive and all-about deprivation. But we have to be conscious about where our money goes if we want to be in control. So think about it as a 'conscious spending plan'. "I am consciously spending money on the things that are important to me in life. My spending is aligned with my values". If it's not, then you need to look at why. What are the emotional triggers that are causing you to spend and splurge on things that you don't really care about?
4. Automate everything. The best way to save more, avoid late fees, make your life easier and get out of your own way is to automate as much of your financial life as possible. It probably takes me one hour a month to keep track of everything because it’s all on autopilot.
GL: There is great power in automation. We need discipline in our lives, and most of us struggle with that. Automation is discipline. If you can automate your savings too, even better. Set up an automatic transfer from the account into which your salary gets paid to your savings account. Have it go out on pay day. Then you never see it to spend it.
5. Get the big purchases right. I know I shouldn’t be so judgmental but whenever I see $50-$70k SUVs on the road or enormous McMansions the first thing that pops into my head is, “I wonder how much they have saved for retirement?” Personal finance experts love to debate the minutia of brown bag lunches and lattes but the most important purchases in terms of keeping your finances in order will be the big ones — housing and transportation. Overextending yourself on these can be a killer.
GL: This is so true. I have often wondered why people harp on about cutting out their daily lattes etc whilst living in a house that is far too big and expensive for them. The monthly expenses associated with the house are many multiples more than the latte. Ditto to driving around brand new cars. The big purchases are the ones that really matter.
6. Make more money. Saving and/or cutting back is a great way to get ahead, but it’s an incomplete strategy if you’re not trying to earn more by enhancing your career. Too many people are stuck in the mindset that there’s nothing they can do to get a better job, take on more responsibilities or earn a higher salary. That’s nonsense.
GL: Earning a higher salary is far more powerful in the long-run than cutting back. I do agree that often it's a mindset issue. It's easy to feel stuck where you are, or to not feel that you are worthy of a higher salary. The self-worth piece is often what needs to be worked on first.
7. Don’t think about retirement, but financial independence. The goal shouldn’t be about making it to a certain age so you can ride off into the sunset, but rather getting to the point where you don’t have to worry about money anymore.
GL: Working together with my clients, I help them, over time, get to the point where they never have to worry about money anymore. Yes we all want independence, but I think it's more than that...what we are all seeking is freedom. Freedom to do what we want, when we want, where we want, with who we want. Being responsible with our finances is what gets us there. I hate the word retirement - it's full of so many connotations, and I think it often stops people planning. So I agree, think of it as independence, or even better, freedom.
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As always, all you have to do is drop me a line to start your journey.