Almost everything you ever needed to know about personal finance can be broken down into four simple rules. If you follow these rules, you will have a secure financial future. The four rules are:
Rule 1: Spend less than you earn. How much you make minus how much you spend equals the gap. Make the gap as big as you can. This is the most important and fundamental rule of personal finance. Even if you do nothing else but follow this rule, you will come out okay.
Rule 2: Earn more. How do you earn more? You can get additional education or have additional income streams. Getting more education does not necessarily mean going back to school. It merely means learning new things and looking for ways to improve yourself. For example, think about your job. What additional skills can you learn that will make you a more valuable employee? Income stream means looking for additional ways to get extra money. Can you start a side business, babysit, or write a book or eBook? “It’s better to hang out with people better than you. Pick out associates whose behavior is better than yours and you’ll drift in that direction.” –Warren Buffett
Rule 3: Frugal Living. Maximize every dollar by having a budget and using a spending plan. Live simply. Do you really need the most expensive car or the biggest house? Don’t make yourself miserable. A couple of things you can do include:
- Write a shopping list before you go shopping and stick to it.
- Invite friends over instead of going out.
- Eat more meals at home or brown bag your lunch to work.
- Go to yard sales.
- Don’t spend money just to distress.
- Try generic brands.
The key to frugal living is to find a few simple and easy things you can do without and focus on those. Look for ways to simplify your life.
Rule 4: Manage your money. When you follow Rules one through three, you will have more cash at the end of the month. That cash is your ticket to financial freedom. The more you get each month (the bigger the gap), the better off you are. The trick is not to spend it but to do things that will build a stable future for you. Things you should do include:
- Pay off high interest debt.
- Max out your retirement savings plan.
- Invest in low cost index mutual funds.
- Build an emergency fund.