There are some parts of personal finance that can get pretty complicated – especially those that have to do with investing. There is an almost bewildering array of ways to invest money, all of which have their upsides and downsides. There are people who make literally hundreds of thousands of dollars by picking just the right stock at the right time. Then there are others who lost thousands of dollars picking the wrong stock at the wrong time. Then, in addition to investing in individual stocks there are mutual funds, index funds. bonds, bond funds. Options, a thing called FOREX, gold, silver, real estate – the list goes on and on.
However, there are some things about personal finance that are not at all complicated. In fact, there are rules that have been developed over the years that are pretty darn simple but that you should absolutely follow. And here are seven of them
Don’t think your salary is the same as your savings
A simple truth that many people fail to understand is that your net worth is a lot more important than your salary. Just because you have a big salary doesn’t mean that you’re automatically rich. And you’re not automatically poor if you have a low salary.
Investing is less important than saving
Our second important rule is to first pay yourself. This may sound like the height of simplicity but it’s absolutely essential. Maxing out your savings is the best investment decision you can make because that will give you a big margin of safety in your life. Many financial experts say that before you start investing you need to have the equivalent of six months of your net income tucked away in an emergency fund. This may sound like too ambitious a goal but if you start saving money out of every paycheck you should be able to accomplish it much quicker than you might imagine.
Avoid debt like Ebola
You should try your best to avoid all debt but the one type of debt to avoid like Ebola is credit card debt. This is because it’s just about the number one way to reduce your net worth. Credit card debt can have interest rates as high as 17% or even 19%. Here’s what these interest rates translate into. Say that you owe $5000 on a credit card at 17% interest and make just a minimum payment of $100 each month. Do this and it will take you 87 months to pay off the debt assuming you charge nothing more on that card.
Always get your employer’s 401(k) match
If your employer offers a 401(k) and will match the money you deposit each month up to a certain percentage then take advantage of this without fail. Money your employer contributes is basically free money. If you turn this down it’s like turning down a tax deferred part of your salary each year. While you should max out your retirement contributions if at all possible you should always – at the minimum – save enough to get the match.
Learn your spending habits
Do you understand your priorities? If not, you need to look at where you spend money every month. If you ever want to get your finances under control you have to learn your spending habits. Your goal should be to spend money on cut back on everything but the important things. If you cover your essential expenses and then pay yourself, you’ll never really have to think about budgeting. You can then just spend whatever is left over.
Automate everything you can
If you want to make your life easier, avoid late fees and save more money you need to automate all of your financial life. You should be able to automate your bill paying and saving through your bank. If you find that there are some bills you cannot automate through your bank, you should be able to do it by contacting those companies directly. Once you get everything automated it should take you no more than 60 to 70 minutes a month to keep track of everything.
Get your big purchases right
You can save money by brown bagging your lunches, by eliminating those drive-through lattes, and dining out less but none of these will save you a lot of money. The places where you can save big money is in your big purchases. When it comes time to buy a new vehicle you could spend $50,000 or $60,000 on one of those humongous SUVs or you could buy a nice four-door sedan for $25,000 – and save $25,000. Plus, you’d have much lower monthly payments, which should free up money you could tuck away in your savings account.