Personal finance can be complicated. For me, I’ve found that simplicity serves me best. Here are some of the basic financial rules I use with my money:
1. Budget & Track Your Spending
No matter what your finances are like today, they’ll probably be better if you start tracking spending each month and building a budget. This will let you see what you need to do to start saving, or to increase your savings. At the very least, it lets you see where you’re spending your money. Some banks provide budgeting software built-in with their online accounts, and there are apps which do the same. Personally, I use good old Excel.
2. Spend Less Than You Earn
Once you have a budget, you can figure out what you need to do in order to save money from each paycheque. The goal should be to spend less than you earn. If you’re not there yet, figuring out how to live on less is probably an important first step. Regardless of where you are, think of yourself as a corporation. Instead of using the term “profit”, use the term “savings”. Ultimately, savings and profit are the same thing. They both mean there is money left over once all the expenses are paid. I wish huge profits – wait, make that savings – upon you and your family!
This website dedicates a whole section to the topic of saving. You can check out those blog posts under the Savvy Saving Strategies tab.
3. Plan & Goal Set
Once you have a budget and are saving, you can set financial goals and get your money working for you. When I’m planning, I try to anticipate upcoming expenses and sent aside cash to pay them. I also set annual saving and investment goals which I periodically look at to keep me on track.
4. Maintain an Emergency Fund
I consider an emergency fund the foundation of my finances. It helps me sleep at night knowing I have a cushion to fall back on. Having an emergency fund has allowed my wife and I to address unexpected costs without going into debt or cutting into investments, and to pursue new opportunities. Years ago, we picked up and moved across the country – hello Toronto! My wife landed a job right away, but guess what kept me going? That’s right – my trusty emergency fund. Those interested in building an emergency fund may also want to understand the terms liquid net worth, liquidity, balance sheet, and net worth.
Carrying cash on you is also important. It is like carrying a mini emergency fund with you. I learned that the hard way which you can read about here: Why I Always Carry Cash.
5. Avoid & Eliminate Debt
Debt is the enemy of stability. Even the richest companies, countries, and families have been undone by too much debt. If you’re juggling many different debts or credit sources, it may be worth seeking out a professional debt advisor or credit councillor – often they can help with consolidation or relief options. Generally, paying off high interest debt makes the most sense before moving on to lower cost debt because it makes the most of your money.
Paying down mortgage debt and other consumer debt as fast as possible without harming other financial goals can be another good idea. While interest payments on your mortgage or debt are guaranteed, for the most parts returns on potential investments are not.
For me personally, when I have a debt, I try to pay it off quickly, before moving onto my other money goals. This is because interest payments are guaranteed – but returns on investments are not.
6. Maximize Income
Some people think maximizing income should be their first goal. However, while a high income is better than a low income, it won’t actually help you if the first five rules are being broken. Once you’ve got the first five financial rules down, increasing your income will really give you a boost.
But what do you do with your money once you have an emergency fund, low or no debt, and are saving? The answer: invest! Stocks, bonds, mutual funds, ETFs, real estate, life insurance, commodities – the topic of investing is a big one, and it gets even bigger once taxes come into play. When you’re at this stage consider reading widely, research what works best for you, and seek out professional advice when needed. For me personally, I invest for the long run (i.e. retirement), try to maximize tax advantaged accounts, and aim to invest so that I can sleep at night.
Like with maximize income, some people think investing should be one of their first priorities. To me, this is like putting the cart before the horse. Jumping into investing without a solid financial base could be a recipe for disaster. I’ve seen this often during my career in the finance industry. Attempting to highlight this risk was one of my motivations for making this website. Check out this blog post Investing for Beginners for more on this important topic. Once you have the basics covered you can also read how to Make the Most of Your Investments.
When it comes to my financial rules, I try to keep it simple so I can easily stay on top of my goals and strategies. Though I mostly do it myself, I sometimes want specific advice. If you need financial help, are looking for guidance, or are feeling overwhelmed, shop around for a financial planner who can help you out.
No matter if you DIY or seek a professional – try to keep it simple… and have fun! Stay tuned and subscribe for more free financial content in the future.
Please keep in mind I am not a financial advisor and the opinions expressed are my own. My Money Moves does not provide financial advice – it is an informational website that details my own approach to my own money and personal finances. If you need specific financial help or guidance, please do your own research and seek out a professional who can work with you to reach your goals.