Every year stats are coming from every angle about how ill prepared most people are for financial problems. One such piece of research reveals that two-thirds of Americans wouldn’t find $1,000 in an emergency. That is scary, and it demonstrates the need to have your personal finances in order.
These are the essential personal finance rules you must know by heart.
1. Personal Debt is the Killer
The reason why most people run into problems is because they take on debt. Across the nation, US credit card holders have $1 trillion in debt, which shows how serious this is. Debt soon spirals out of control and if you already hold debt you should have an action plan to both avoid further borrowing and paying down your debt.
There are certain ‘acceptable’ debts you can hold, but these are long-term debts, such as a mortgage or a car loan. Anything else is an accident waiting to happen, unless you’re trying to boost your credit score.
2. Save Towards Your Retirement
Young Americans who are 20-40 years away from retirement don’t think about what happens when they are no longer earning a regular salary. And if we take compounding into account you are missing out on potentially hundreds of thousands of dollars when your twilight years hit.
As a rule of thumb, you should be investing 10% of your income into a retirement fund. This retirement fund should be invested so it continues to compound and beat the ravages of inflation.
Try to have this amount automatically garnished from your pay check every month so you don’t get tempted to spend before you save.
3. Don’t Live Within, Live Below Your Means
Nobody should be living pay check to pay check if they can help it. You should be saving as much as you can every month. The number depends entirely on your circumstances, but it can be anywhere from 10% to 50% of your income. You know how much you can realistically save.
For example, the US Bureau of Labor Statistics revealed that Americans spend a whopping 47% of their food budget on eating out. Some extra cooking could save you hundreds of dollars every year.
It’s the little things that really add up.
4. Manage Your Cash Flow
Do you know why companies send a check by phone instead of performing a simple bank transfer when paying for goods and services?
They want to space out their payments to keep their cash flow positive. You can adopt the same principle. Don’t immediately buy something you like. Wait a few months and buy that big TV when it is on sale. This can useful when you need urgent cash – since having access to cash quick without extremes is of importance in certain circumstances.
Without a solid budget this is impossible to accomplish. You must closely monitor your finances every single month if you are going to manage your cash flow.
It doesn’t have to be complicated. A simple Excel spreadsheet is more than enough to help you track your monthly income and expenses.
Cash flow is the lifeblood of your personal finances. Make sure it doesn’t run dry!
5. Don’t Pay the Minimum on Debt
Nearly a third of all Americans pay the minimum on their credit card bills every month. Logic dictates that this is smart because it frees up your cash flow and opens more money for your monthly budget.
Unfortunately, this is like death by a thousand paper cuts. Pay the minimum and you’re getting stung by the interest, meaning the debt lasts longer.
In a lot of cases the interest rate may be so high that making the minimum payment causes your debt to increase every month.
Smart people pay off as much as they can, according to the debt with the highest interest rate and the debt with the highest amount to be paid.
Even if it means cutting back on luxuries for a few months!
Last Word – Be Conservative in Finance
Most people are aggressive in their spending habits. This is precisely why financial problems happen. You should be looking to the future in how you save and spend. Think about how each spending decision impacts you months and years from now.
Avoid bowing to impulse and you’ll be in a much better position. Do you have any other rules for managing your personal finances?