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.
... continued below
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The Four Golden Rules Of Personal Finance ... continued from above
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.
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.
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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
spiralling 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 paralyses people from getting
assistance and dealing with the situation.
For example, if you just lost a loved one,
balancing your cheque book 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 favourite 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 neighbourhood that you live in also creates
financial pressure to violate the first two financial goals.
Your neighbours 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 neighbours – 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 fulfilment 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.
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About the Author:
Francis
Kier has an MBA in finance and shares his two decades of experience with
investing and personal finance.
Disclaimer:
The information contained above has been provided as a general
service. Any references to specific financial, legal, accounting, or
taxation issues are done so in the context of general information
and should not be relied upon as fact or construed as advice by the
us in any of these areas. You should consult a relevant financial,
legal, tax or accounting professional to assist in your particular
circumstance. |
