The Four Golden Rules Of Personal Finance

Many successful people have mentors to​ guide them in​ learning the skills that lead to​ achievement, and I’ll do my best to​ offer you some critical personal finance perspectives. They say that 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​ time to​ fix catastrophic financial mistakes that you have made over time. as​ long as​ you are alive, you are a​ player on the field of​ the money-game, and you need to​ know the basic rules before you get tagged by the experienced players.

Rule #1: to​ earn money from money. The only way to​ escape becoming a​ wage slave for the rest of​ your life is​ to​ set aside savings. The profit on your savings can be used to​ increase your lifestyle spending, reduce the number of​ years until you retire, or​ allow you to​ actually have any retirement at​ all. How are you doing so far toward saving and getting it​ to​ earn money for you?

Every dollar that you spend eliminates its ability to​ earn money for you in​ the future. I am not recommending that you stop eating at​ restaurants and going to​ movies, I am recommending that you use some common sense, like looking at​ your four biggest expenses over the last few months and aggressively finding a​ way to​ reduce them.

The biggest obstacle for the first rule is​ personal debt of​ any kind (other than a​ mortgage for your home) or​ a​ lease of​ any kind. Every personal debt that you incur reduces your net worth which could have been working for you over your life time. Acquiring personal debt is​ exactly like putting a​ large hole in​ your wallet. in​ the money-game, a​ huge transfer of​ wealth occurs between the ‘Haves’ and the ‘Have-Nots’ over the words, “I can afford that monthly payment.” Here is​ a​ hint: the “Have-Nots” are the ones who make that statement. So please don’t ever look at​ whether you can afford a​ monthly payment to​ make a​ purchase; pay in​ cash after you’ve saved for the item. [Everything that you buy with a​ 0%-interest payment plan must be over-priced. Behind the scenes, your payment contract is​ sold to​ a​ lender with an​ interest rate, and retailers don’t do this without building-in an​ acceptable profit for themselves. Ask retailers how much the item will cost if​ you pay in​ full, and you could get a​ lower price.]

Rule #2 Always keep your finances under control. The first step in​ losing financial control and spiraling into debt and money problems is​ simply not dealing with personal finances. Prepare for catastrophic financial accidents with health, life, disability, and auto insurance. Plan and save before you buy something. Create a​ balance sheet for yourself at​ least once a​ year to​ see how you are progressing. Pay every bill on time, or​ contact the creditor to​ tell them what is​ going on and make a​ partial payment. if​ you are temporarily unable to​ handle any of​ this, ask for some help immediately and find someone trustworthy who will do this for you.

The most common source of​ financial trouble is​ a​ trauma in​ your life. This can be a​ health problem (large expenses or​ unable to​ work), an​ emotional problem (divorce or​ loss of​ loved one), or​ a​ financial problem (losing a​ job, cut in​ pay, relocation, unexpected expenses). Whichever the source may be, it​ leads to​ three emotional problems: the first is​ denial, the second is​ being overwhelmed, and the third is​ hopelessness. Denial causes people to​ not open their mail and continue spending as​ usual, and being overwhelmed paralyzes people from getting assistance and dealing with the situation. For example, if​ you just lost a​ loved one, balancing your checkbook and paying bills is​ not high in​ your priorities. Unfortunately, tiny amounts of​ debt grow with interest and penalties into seemingly insurmountable mountains of​ debt; leaving you with loathsome options such as​ bankruptcy, poor credit, declining lifestyle spending, and added stress that you bring to​ relationships and work.

Rule #3 Pay attention to​ the finances of​ the people with whom you spend the most time. Whether they are relatives, friends, or​ co-workers, these people have the most impact on your financial life. Do they consistently follow the first two rules of​ the money game? Do they earn about the same money as​ you? if​ the answer to​ either of​ those is​ “no”, then I recommend that you start spending a​ little less time with them; and this is​ why. if​ they don’t consistently follow the first two rules, it​ is​ unlikely that you will either. You unconsciously model the people around you, and the more people you are exposed to​ that don’t follow the first two rules, the more likely that you will unwittingly follow them. No one thinks they are ‘trying to​ keep up with the Joneses’, but we all do it​ to​ some extent, and this is​ the mechanism. On the other hand, if​ they earn a​ lot more money than you, you may rack up a​ lot of​ debt trying to​ keep up with them (meeting them at​ their favorite expensive restaurant, joining them for another expensive vacation, buying a​ new car because yours is​ the junker among all of​ your friends, etc.) On the other hand, if​ most of​ your friends earn a​ lot less than you, you will turn into the group’s banker. For example, you’ll find yourself in​ the pattern of​ putting your credit card down to​ pay 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 advantage of​ 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​ house and they expect you to​ write the checks because you have the money available and they do not.

The neighborhood that you live in​ also creates financial pressure to​ violate the first two financial goals. Your neighbors are likely to​ become friends (and I’ve already gone over this), but they also influence the size of​ your home, extent of​ your landscaping, price of​ furniture, and the size of​ your TV. So pay very close attention to​ the finances of​ your neighbors – if​ you don’t like how they are measuring up for first two rules, move somewhere more in​ alignment with your financial goals. if​ your family and friends, don’t measure up financially, find some additional people to​ spend time with that have financial habits that you’d like to​ emulate and learn from. I have friends with a​ wide range of​ income, but it​ is​ much more difficult to​ follow the first two money rules when I am with the extremes from my own income. You’ll just find it​ easier to​ reach the next rule when the peer group that you hang out with aligns closer to​ your economic level.

Rule #4 Accelerate the other three rules:
Add to​ your savings by increasing your income through advancing your career. it​ doesn’t matter whether you enjoy it; it​ is​ a​ means to​ an​ end – with the end being progress toward the fulfillment of​ rule #1. Increase the amount that you save by aggressively lowering four of​ your highest expenses. Start spending time with people that talk about investing money and are systematically building their wealth the fastest. The combination of​ all four of​ these rules will hopefully offer a​ next-step for you to​ take today to​ start getting more ‘wins’ in​ the money-game.

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