This article will share a lifetime of lessons in personal finance and budgeting that anyone can use. These concepts and practices have helped me throughout life and can be summarized with 12 simple rules. Note that this is just my personal opinion based on what actually worked for me or people I knew. Read on, learn, and use what you can.
Personal Finance Rules
I started life on my own as a teenager with just a $30 boombox and some basic personal finance rules taught to me by my step-father. I’ve practiced and adjusted them for 35 years since then. These rules may or may not apply to you at any given time. If they do apply, I suggest sticking with them.
This article will touch on ideas to help you, but there is no substitute for formal learning. Take and encourage high school finance classes that teach how to write a check and how to budget. Find books with more details on any topics that are not clear. Find other ways to handle your money more effectively. Finally, keep an open mind to new and better ideas.
2. Only spend what you have
It may seem obvious at first, but the trap of credit can quickly make you forget this rule. Personal finance really means personal responsibility. That means only spend what you already have. In our society where everyone believes they should have the best of everything, make good choices to fit your lifestyle to your income. Don’t run up credit cards. Plan on having better stuff later rather than going in to debt now.
3. Never impulse buy!
You walk into a store to buy something on your list (I’ll explain the list in a minute). You walk out of the store with 5 items that weren’t on your list. How did that happen? You walked by something and said “Oooh. I have to have that!”. You grabbed it and next thing you know, it’s yours. Well if you had to have it, why wasn’t it on your list?
Start by making a written list (like on a post-it note) of everything you need before going into the store. Then simply don’t buy anything not on the list! If you see something you really want or need that isn’t on your list, note it for another visit. Show some discipline and wait.
To make this easier, I set a threshold amount to not impulse buy over. If I go in a store and I see something I want that is less than $10, I may buy it. I still stop and think “Why do I need this? How will I use it. Will it bring me joy?”. Maybe I’ll ask my wife and consider her input. Anything over $10, I say no myself!
4. Pay off credit cards EVERY month
Credit and debt are a trap! By using them, you just hand a ton of money to some rich stranger. If you use a card, pay off the entire balance every month so you don’t pay any interest.
I believe in having and using credit cards for three reasons:
– Protect you from an unknown vendor. Unlike personal checks, credit card charges are reversible.
– Develop your credit score for when you need a property loan later.
– Accumulate rewards.
Besides that, credit cards are just a scam.
Here is an example: I want to buy a new phone. It costs $500. I have $300 available to spend on it. My credit card limit is much higher than that, so I put the $500 on the credit card and I’ll worry about paying it off later. No, no, no! Instead, wait until you have the $500 to spend, still put it on your credit card, then pay off the $500 in full next month. Never stray from this rule and you will avoid the trap.
The main concept of budgeting is to not spend more than you make. That sounds simple, but if you don’t track what you spend, how would you know if it is less than you make? This can apply to a person of any age. I’ll start with a simple plan and end with a full working budget.
5a. Simple budgeting: 2-2-1
The plan is called 2-2-1 because out of every $5, $2 goes into long-term savings, $2 goes into short-term savings, and $1 goes into spending.
Long-term savings is for expensive items that you want to save up for and accumulates over time until you have enough. An example would be a car. This could be in a savings or investment account since it won’t be pulled from frequently. Long-term savings is also for unexpected expenses. Examples include home repair and car repairs you had not planned.
Short-term savings is for smaller-priced items that requires some saving. An example would be a pair of shoes.
Spending is for every-day items. An example would be groceries.
The 2-2-1 budget can be scaled based on income. It applies to a $10 child’s allowance or a salary of any amount.
5b. The Detailed Monthly Budget
To get a more accurate view of expenses, you need an itemized monthly budget. For each item, you have a monthly target and after each month, an actual total. I also track a % to target. Items can be in categories such as items like electric and water in a category called Utilities. Also, all monthly items are totaled into annual amounts. Here is a Google sheets link to a sample budget spreadsheet: Monthly Spreadsheet Example The spreadsheet is just a starting point. You can change the items and categories as needed. Just remember the total at the bottom uses both items and category totals. Adjust the total as you change those items and categories. Note that it also includes lines for short and long-term savings that you may or may not need.
At the beginning of every month, review your expenses from the previous month, update the budget spreadsheet, and see how close you come to your goals. Adjust your spending accordingly. Sometimes I adjust the budget amount as long as the total is not exceeded (removing from somewhere else).
5c. Budgeting Software
If you like online/software tools, you can make it even easier to figure out what expenses you have. I recommend using Quicken or Mint. Both are highly evolved platforms owned by Intuit (who also makes Quickbooks for businesses). These tools can pull the expenses directly from your bank account and even apply budget amounts. If you use software like that, the spreadsheet example is not even needed. Just do it all online.
I touched on debt avoidance when discussing credit cards. It deserves more attention. The bottom line is that any debt holds you down. Most people have loans for houses and cars, and maybe college. Those are unavoidable, but that should be it. If possible, get a shorter loan. For instance a 15-year mortgage instead of 30-year mortgage on a house. All loans should allow extra payment towards the principal. If you can pay extra on the principal each month, it can really help pay off the loan sooner. That applies to all kinds of loans. Never get a variable rate loan or any loan that has the word “balloon” in it. The bottom line is just to minimize what you owe.
7. Don’t eat your money away
Simply put, eating a restaurants frequently will use up all your money. If going out to eat is something your enjoy, consider it a treat. Something is a treat only if enjoyed every so often. Include a dining line item in your budget based on eating out once a week (or what works for you) and try to stick to it.
8. Spend consciously
I heard a quote once that goes “If you take care of your money, it will take care of you”. Before buying something, I try and consider how I would use it. Is it a “need” or a “want”? Could it be more important than something else I may need or want? Is it something I will use every day that will make life easier or better? I believe if you use something every day, you should get a quality version of an item. For example, you brush your teeth every day and dental care is important. So I invest in a nice Sonicare electric toothbrush rather than a regular manual toothbrush. The idea is if you don’t use an item it or it doesn’t bring you on-going joy, then you don’t need it.
When buying an item at a store or restaurant, I try not to use cash. Why? If I spend cash, the transaction can’t be logged and I won’t know what I spent it on. I use a credit card in any establishment I don’t know well. I use a debit card for well-known locations. For any amount under $10.00, I use cash. An example would be a fountain drink at a convenience store.
Another trick I read about once and perform regularly is as follows: When you have cash in your wallet, arrange all the bills facing the same way. When you do that, consciously think about spending carefully. If you don’t, it may seem that your money just disappears.
Any boat owner has heard the joke that a boat is a hole in the water you pour money into. A car is the same. Most people know that buying a new car wastes money because it loses value as soon as you drive off the dealer lot. It is much more economical to find a good used car that has some warranty left. I’ve used both CarMax and dealers selling used cars. TrueCar shows the value, so you know what the vehicle is worth. Unless you buy at CarMax (which allows you to bring it back if an issue), make sure a different trusted mechanic checks out the used car before you buy it. When buying, be prepared to walk away. I did that with my last car and the dealer called me the next day agreeing to my original firm price.
10. Savings and Investments
Once you make a budget and find a way to spend less than you make, planning for later is most important. You use your home and car now, but you’ll need savings later for kids and retirement. Start saving as soon as you can!
10a. Savings Strategy
Good investment advisors will tell you that you are investing for the long-term and that is true. When you’re younger, you can take more risk in your investments (with more possible return), though beware of taking on too much risk. Properly diversifying helps reduce this risk. When you’re older, you won’t want to have as much risk in your investments as you will want and need to preserve all that you’ve worked hard to accumulate. I believe in finding a trustworthy investment advisor that is a certified independent advisor. They should help with your savings strategy and your entire personal finance planning.
10b. Start with a 401(k)
From my experience, the best way to save for retirement is a 401(k) or IRA. It allows for tax-deferred savings. The idea is you take the money out when you have less income, so the taxes will be lower. Many employers take the investment out of your pay-check so you don’t even miss it. Put in as much money as you can up to the legal limit. If your employer has a matching plan, that’s free money!
11. Don’t do Business with Family
I heard this edict long ago and wondered why this rule was made. In business, you are inherently looking out for your own interests. That could pit family members against each other. Unless you have some really strong ground rules that prevents competition, avoid mixing business and family. One example is where a family member invited another to join in an investment opportunity. The invited member put ALL their retirement money in the investment. The investment was risky, they lost it all, and the rift between the two family members never healed.
12. Economic Outpatient Care
It is hard for young people to get financially independent on their own. Parents have to decide how much to support their children as they become adults and begin their own independent careers. It is an immensely difficult decision. The goal is to help the young adult become independent. If they learned good financial decision-making, it is achievable. If they don’t and come asking for chunks of cash to bail them out, a tough love approach will let them know they need to handle it and it will keep them from siphoning off your money. When parent keep handing adult family members cash, that is called “Economic Outpatient Care”. I’ve seen it literally run people dry who had sizable savings. Make it clear ahead of time that you don’t intend to do it. Then stick by your commitment to let them succeed on their own.
The Bottom Line
All these personal finance tips, when used together over time, have helped me manage finances for many years. Try them yourself and see how they work for you.