Becoming wealthy is really not rocket science. You simply need to develop good financial habits and follow the 15 financial tips in today’s blog post.
Here are my top 15 financial tips for young families:
- Sock it away – If you only follow one of the financial tips in today’s article, it has to be this one. The most important financial advice of all time is…spend less than you make. Saying it another way, never let your “current self” borrow from your “future self.” Many people tell themselves it’s okay to overspend today because they’ll earn more money down the road. Half of the time that doesn’t pan out, but even if it does, there may be higher expenses in the future (e.g., more children, home purchase, medical expenses, etc.).
- Prepare for the unknowable – Cash is king for solving all of the problems that life throws at you. You never want to find yourself in a desperate situation that results in bad financial decisions, such as using high-interest credit cards that you are unable to pay off. You need an emergency fund that is secure and fully liquid. That means suffering low interest rates at the bank. Bummer. The minimum emergency fund should be three months of living expenses.
- Eliminate high-interest debt – Call all of your debtors and try to refinance, consolidate, negotiate a lower rate, or any other step that lowers the rate without adding fees or extending the term of the loan. Step 2 is to organize your debts by interest rate; then pay off the highest rate debts first. This sounds like common sense, doesn’t it?
- Visualize your future and back it up with contributions – Once your high interest debts are out of the way, start saving for retirement. Always maximize any company match (it’s free money!) and never borrow from your retirement fund. If you don’t have a 401(k) or similar plan at work, set up an IRA or Roth IRA with any brokerage firm (e.g., TD Ameritrade, Schwab, Fidelity, Vanguard).
- Protect your loved ones – Term insurance is the least expensive way to buy life insurance. Premature deaths happen. At least seven people I went to high school with have already passed; some of them were in good health. There is no universally agreed on formula for how much you need, but a reasonable range of coverage is between five and 15 times your annual living expenses. For example, you may need insurance coverage for 15 times your annual living expenses if you have young kids and minimal other savings/investments. You may only need 5x if you are older, with grown kids and significant savings. You may not need any life insurance if no one depends on you financially or you are already retired and/or your retirement is fully funded.
- Know where your money goes – The best way to build a budget is to look at your actual spending over the previous few months. Just estimating each expense category will not be at all effective, so don’t waste your time. Instead, get in the trenches. Dig through bank statements and credit card receipts. Keep a spending journal for three months. This process will lead to new insights on where to save and will inspire you to cancel services you don’t use and to cut the fat from every one of your bills.
- Find hobbies that don’t cost a lot – For example: hiking = good, skiing = bad.
- Never gamble or play the lottery – I think this one is self-explanatory.
- Ignore “professional” economic forecasts – The standing joke is if you ask 10 economists, you will get 11 different answers. Often, economic forecasts are dead wrong, and even if they’re not, they’re rarely good indicators of what you should be doing with your professional life or your money. Don’t base your personal finance decisions on what someone predicts will happen in the future, ever.
- Keep everything as simple as possible – The more bank accounts, investments, and bills you have, the more time and energy you have to spend to stay on top of them all. More accounts equals more chances for lost cards, errors, and identity theft. Simplify your financial life. Cancel some of those cards.
- Know how much money you make per hour worked – Figure out how much you earned last year after taxes; then subtract from that all of your un-reimbursed work-related costs (e.g., work clothes, commuting). Then, figure out how many hours you worked (including those at home), plus the hours you commuted and attended other business meetings. Divide your after-expenses income by total hours worked to get your true hourly wage. That’s how much you actually sell an hour of your time for.
- Use your take home wage/hour as a comparison point for everything you buy – Let’s say your “true wage” is $50 per hour. If you are looking at buying a $5,000 piece of jewelry, ask yourself whether owning it is worth 100 hours of your life.
- Use the 10-second rule – Whenever you’re tempted to make an impulse buy, simply hold it in your hand for 10 seconds and ask yourself honestly whether you need it or not. Actively try to think of reasons why you shouldn’t buy this item (e.g., my spouse will kill me). If you still really want if after 10 seconds, buy it!
- Use the 30-day rule, too – For more expensive items, use the 30-day rule. You can draw the line between “cheap” and “expensive” where you please—simply choose to wait 30 days after your first serious impulse before buying the expensive item. Use that time to do a little research and make sure you actually want or will use the item. You are likely to find a better deal or something you want even more during the 30 days.
- Don’t keep up with the Jones’ – If you see someone driving an expensive car, don’t use that as an excuse to feel jealous or to tell yourself that you, too, need an expensive car. You don’t. Just because other people choose to buy things or eat at certain restaurants or whatever else people in your life choose to do with their money does not mean you need to do it, too. Don’t choose a house, car, clothes, or jewelry to impress other people. Why? Because it won’t really impress them. The only thing that will impress someone about you is how you carry yourself, what ideas you have, and how you listen and respond to others.
You can be a little more capricious with your financial decisions once you are wealthy (or at least comfortable). However, I have observed that people tend to remain financially prudent even when they no longer “need” to be.
These financial tips not set in stone. The closer you can stick to them, the better off you are likely to be. Have I always followed these financial tips perfectly? Of course, I have! At least that’s my story…and I’m sticking to it. 🙂