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The Four Golden Rules Of Personal Finance
Many successful people have mentors to guide them in learningthe skills that lead to achievement, and I'll do my best tooffer you some critical personal finance perspectives. They saythat 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 timeto fix catastrophic financial mistakes that you have made overtime. As long as you are alive, you are a player on the field ofthe money-game, and you need to know the basic rules before youget tagged by the experienced players. Rule #1: To earn money from money. The only way to escapebecoming a wage slave for the rest of your life is to set asidesavings. The profit on your savings can be used to increase yourlifestyle spending, reduce the number of years until you retire,or allow you to actually have any retirement at all. How are youdoing so far toward saving and getting it to earn money for you?Every dollar that you spend eliminates its ability to earn moneyfor you in the future. I am not recommending that you stopeating at restaurants and going to movies, I am recommendingthat you use some common sense, like looking at your fourbiggest expenses over the last few months and aggressivelyfinding a way to reduce them.The biggest obstacle for the first rule is personal debt of anykind (other than a mortgage for your home) or a lease of anykind. Every personal debt that you incur reduces your net worthwhich could have been working for you over your life time.Acquiring personal debt is exactly like putting a large hole inyour wallet. In the money-game, a huge transfer of wealth occursbetween the 'Haves' and the 'Have-Nots' over the words, "I canafford that monthly payment." Here is a hint: the "Have-Nots"are the ones who make that statement. So please don't ever lookat whether you can afford a monthly payment to make a purchase;pay in cash after you've saved for the item. [Everything thatyou buy with a 0%-interest payment plan must be over-priced.Behind the scenes, your payment contract is sold to a lenderwith an interest rate, and retailers don't do this withoutbuilding-in an acceptable profit for themselves. Ask retailershow much the item will cost if you pay in full, and you couldget a lower price.]Rule #2 Always keep your finances under control. The first stepin losing financial control and spiraling into debt and moneyproblems is simply not dealing with personal finances. Preparefor catastrophic financial accidents with health, life,disability, and auto insurance. Plan and save before you buysomething. Create a balance sheet for yourself at least once ayear to see how you are progressing. Pay every bill on time, orcontact the creditor to tell them what is going on and make apartial payment. If you are temporarily unable to handle any ofthis, ask for some help immediately and find someone trustworthywho will do this for you. The most common source of financial trouble is a trauma in yourlife. This can be a health problem (large expenses or unable towork), an emotional problem (divorce or loss of loved one), or afinancial problem (losing a job, cut in pay, relocation,unexpected expenses). Whichever the source may be, it leads tothree emotional problems: the first is denial, the second isbeing overwhelmed, and the third is hopelessness. Denial causespeople to not open their mail and continue spending as usual,and being overwhelmed paralyzes people from getting assistanceand dealing with the situation. For example, if you just lost aloved one, balancing your checkbook and paying bills is not highin your priorities. Unfortunately, tiny amounts of debt growwith interest and penalties into seemingly insurmountablemountains of debt; leaving you with loathsome options such asbankruptcy, poor credit, declining lifestyle spending, and addedstress that you bring to relationships and work.Rule #3 Pay attention to the finances of the people with whomyou spend the most time. Whether they are relatives, friends, orco-workers, these people have the most impact on your financiallife. Do they consistently follow the first two rules of themoney game? Do they earn about the same money as you? If theanswer to either of those is "no", then I recommend that youstart spending a little less time with them; and this is why. Ifthey don't consistently follow the first two rules, it isunlikely that you will either. You unconsciously model thepeople around you, and the more people you are exposed to thatdon't follow the first two rules, the more likely that you willunwittingly follow them. No one thinks they are 'trying to keepup with the Joneses', but we all do it to some extent, and thisis the mechanism. On the other hand, if they earn a lot moremoney than you, you may rack up a lot of debt trying to keep upwith them (meeting them at their favorite expensive restaurant,joining them for another expensive vacation, buying a new carbecause yours is the junker among all of your friends, etc.) Onthe other hand, if most of your friends earn a lot less thanyou, you will turn into the group's banker. For example, you'llfind yourself in the pattern of putting your credit card down topay 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 advantageof 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 houseand they expect you to write the checks because you have themoney available and they do not. The neighborhood that you live in also creates financialpressure to violate the first two financial goals. Yourneighbors are likely to become friends (and I've already goneover this), but they also influence the size of your home,extent of your landscaping, price of furniture, and the size ofyour TV. So pay very close attention to the finances of yourneighbors - if you don't like how they are measuring up forfirst two rules, move somewhere more in alignment with yourfinancial goals. If your family and friends, don't measure upfinancially, find some additional people to spend time with thathave financial habits that you'd like to emulate and learn from.I have friends with a wide range of income, but it is much moredifficult to follow the first two money rules when I am with theextremes from my own income. You'll just find it easier to reachthe next rule when the peer group that you hang out with alignscloser to your economic level.Rule #4 Accelerate the other three rules: Add to your savings byincreasing your income through advancing your career. It doesn'tmatter whether you enjoy it; it is a means to an end - with theend being progress toward the fulfillment of rule #1. Increasethe amount that you save by aggressively lowering four of yourhighest expenses. Start spending time with people that talkabout investing money and are systematically building theirwealth the fastest. The combination of all four of these ruleswill hopefully offer a next-step for you to take today to startgetting more 'wins' in the money-game.
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