It’s good to periodically review the personal finance basics. These aren’t earth shattering, but they do help you get ahead.
1. Live below your means. The principle behind this is simple. If you earn 1,000 bucks per month, but you spend 1,100, then you’re running into trouble. But on the other hand, if you earn 1,000 bucks per month, but you only spend $900, then you’re in good shape. It’s one of those basic things that everyone knows, but it works. Especially if you do it over the long term.
2. Automate your finances. Getting your finances on autopilot generally means moving your cash around using electronic transfers. This could be deducting some of your cash directly into your 401k or automatically sweeping some of your cash from your checking to your savings account every month. The idea here is that it saves you the labor of having to make the transfers yourself. It’s also good because if you’re bad at saving money, you give yourself fewer opportunities to waste your cash when you automate.
3. Save. Do it. Save. There isn’t any getting ahead with credit. You’ll have to pay interest, which creates substantial drag on your wealth building. If you want a house, a car, stocks, etc. You have to save. There just isn’t any substitute for good old-fashioned saving. Saving your money also empowers and focuses you on what you really want.
4. Invest regularly. There are plenty of examples of people who have managed to invest regularly for decades who have achieves substantial fortunes – like a couple of million for having invested over 20 or 30 years. This is because U.S. equity markets have enough integrity to allow you know if you’re investing wisely and because investing in good quality blue chip stocks tends to snowball your capital over time.
5. Be careful about debt. The major issue here is that high interest credit card debt can really put the brakes on your wallet. Credit cards are still charging north of 20% in addition to other added fees. Car loans range from 3 to 9% and credit for things like weddings, furniture, and computers can be as hefty as 18%. The bottom line is that is that these kinds of interest rates are great for people who are lending money, not for people who are borrowing it.
Think about it, do you know anyone who got into financial trouble because they didn’t borrow enough money? Probably not.
6. Maximize your returns. It takes money to make money. Open an account with a mutual fund company that has no-load funds and low expense ratios. Build a diverse portfolio and you can reasonably expect to earn 8 percent to 10 percent annually on your investments over the long haul. This is because diversification actually means you get higher returns and lower volatility. Simply put diversification = more money for you.
7. Get a plan. Usually knowing where you are going is a prerequisite for getting there. Get a plan, write some goals. Be sure your plan is achievable and measurable. This will help you focus. Also, people who have goals tend to be more likely to achieve them.