When you hear the term personal finance does it cause you to roll your eyes? Or maybe it just puts you to sleep or causes a headache. We understand that the subject of personal finance is not an exciting one. But it is an important one. We’re sure you know the old saying that insanity is doing the same thing over and over but expecting a different outcome. Personal finance is a bit like that. If you’re having a problem with your finances it’s probably because you’re continuing to do the same things over and over but hoping for different outcomes.
The good news is that it’s easy to learn the important stuff about personal finances and here it is.
#1: Don’t buy lottery tickets
States don’t run lotteries unless they can make a profit. The way they win is by you losing. In many lotteries your odds of winning are one in several million. You would stand a better chance of walking outside and being hit by lightning. Plus, studies have shown that people who win those huge jackpot lotteries end up no happier than those that lost.
#2: Buy high-deductible car and home insurance
While you need to have insurance on your house and car, it can be very expensive. If you buy high-deductible insurance, you’ll save money over the long run but will still be protected against those big-ticket items like having to replace your roof.
#3: Keep it simple
Were sure you’ve heard the old acronym KISS as in Keep It Simple, Stupid. We’re sure you’re not stupid but you do need to keep it simple. When you try to follow complicated financial strategies it just makes things tougher and your life more stressful. All you really need to manage your personal finances successfully is a budget and a savings account. Creating that first budget doesn’t have to be that tough, either. The easiest way to do it is to get out your checking account statements and credit card bills for the past month and total them up. Then compare this to your total earnings for that month. Ideally you should be spending at least 10% less than you earn. If not, you’ll need to go back to those statements and make a list of your spending by categories such as food, dining out, entertainment, utilities and so forth. That will show you roughly where your money’s going. Once you do this you should be able to see where you can make cuts in your spending to get it down to that 10% less than your earnings.
#4: Create an emergency fund
If you’re wondering why it’s important to get your spending down to less than 10% of your earnings it’s so that you can use the difference to create an emergency fund. You must have an emergency fund. Let us repeat that. You must have an emergency fund to shield you from the unexpected. When you don’t have an emergency fund and you run into an unexpected occurrence your only option will be to borrow money, which means creating debt.
#5: Protect yourself from worst-case scenarios
Disasters happen. We’re not talking about needing to put a new transmission in your car or pay for a medical emergency. We’re talking about a real disaster such as losing your job or becoming disabled. You can buy disability insurance either directly or through your job. It’s a relatively inexpensive way to protect yourself. You should also buy term insurance to protect your loved ones in the event you suffer the worst-case scenario possible, which is to die. If you’re in, say, your mid-30s you should be able to buy $100,000 or more in term life insurance for practically pennies a month.
#6: Learn to be content with what you have
We all tend to be on what’s called the “hedonistic treadmill,” which is that no matter how much we earn we want more. Try not to pin your hopes on that next raise or a new high-paying job. The only path to true happiness is by getting off the treadmill and learning to be satisfied with what you have.
Credit cards come with the highest interest rates you’ll probably ever pay on a loan. In fact, we’d be surprised if you don’t have at least one credit card with an interest rate of 19% or even higher. When you rollover the balance on a credit card the interest will be compounded meaning that you’ll be paying interest on the interest you accrued the month before and so on and so on. There are essentially two ways to pay off credit card debts. The first is to order your debts from the one with the highest interest rate down to the one with the lowest and then do everything possible to pay off the card with the highest interest rate, as this will save you the most money. The second method is called snowballing your debt. It’s where you list your debts from the one with the lowest balance down to the one with the highest and then do everything possible to pay off the card with the lowest balance. Whichever of these methods you choose be sure to keep making the minimum payments on your other cards.
#8: Never buy a vacation home as an investment
Sharp sales people will tell you that a vacation home is a good investment because of the depreciation you’ll earn. What they won’t tell you is that the cost to finance and maintain that vacation home will outweigh the depreciation you’ll earn. It just makes much better sense financially to rent a vacation home two or three weeks a year rather than buying it.
#9: Don’t spend money trying to impress people
“Luxury” clothes labels and designer brands are designed to overcharge people that are seriously insecure. You’ll save money when you buy non-designer brand clothing and you won’t be seen as nouveau riche. Watch what old-money families do and you’ll see they generally keep it on the down low.
#10: Cut out the waste
Review your bills and you’re very likely to find ones where you’re spending too much. One of the best examples of this is your cell phone bill. You may also be spending too much money on your car or cars. And nothing busts the budget more than dining out regularly.
#11: When you invest put the majority of your money into equities (stocks)
Once you build up an emergency fund equal to three or six months of your living expenses you can begin investing. The best place to put your money into is equities or stocks. They might be the most volatile but they almost always generate the best returns long term of anywhere from 4% to 5% a year above inflation. And don’t panic when your stocks plummet. Hang on to them, as they will come back.
#12: Never gamble on individual stocks
Your Uncle Henry might tell you that you’ll double or triple your money by buying stock in Amalgamated Industries but don’t do it. You could make money this month but then see it all disappear next month. The safest way to invest money in stocks is by buying mutual funds or indexed funds.
#13: Plan to live a long life
The odds are that you will live one third of your life after you turn 65. This means the best strategies are to pay off your mortgage and then save at least 10 times your annual salary by the time you’re ready to retire. Also, avoid taking your Social Security benefits for as long as you can up to when you turn 70. This will maximize your monthly checks.