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Eight Key Rules of Personal Finance

Eight Rules That Will Help You Manage your Personal Finances

A lot of the time, managing personal finances can seem difficult and even potentially overwhelming. However, it doesn’t have to be complicated, difficult, and confusing. By following a few simple rules, you’ll put yourself in a much better financial position, avoid debt troubles, and learn more about personal finance.

Here are eight key rules of personal finance.

Salary is not the same as savings

Your net worth is more important than how much money you make. Many people don’t realize this, but your financial situation depends on much more than your salary. Having a high salary does not automatically make you rich; having a low salary does not automatically make you poor. What matters is how you use your salary and how much of your income you are able to save.

Saving is more important than investing

Pay yourself first. You’ve likely heard this saying before, but it’s a critical one. Saving money is important. The best investment decision you can make is setting a high savings rate because it gives you a huge margin of safety in life. If you’ve saved money, you’ll be able to cope with unexpected expenses like your car breaking down, or situations like a job loss where you may be out of income for a while. Having savings prevents you from going into debt when something unexpected happens.

Avoid credit card debt like the plague

Carrying credit card debt is a great way to negatively compound your net worth. Credit card interest rates are often incredibly high. If you’re not able to pay off your balance in full each month, you end up spending a lot of money (and taking a long time) to repay your debt. By the time you’re done, you’ve likely paid significantly more for your purchases and hurt your financial situation. Don’t put more on your credit card than you can afford to repay each month.

Live below your means, not within your means

The only way to get ahead financially is to stay behind your own earnings power. Create a budget and stick to it. Make sure to have a category in your budget for savings. Avoid spending every dollar you earn. By creating a budget and sticking to it, you’ll be able to live below your means, put some money aside each month for savings, and avoid getting into financial trouble.

Credit itself is important

Likely the biggest expense over your lifetime will be interest costs on your mortgage, car loans, student loans, etc. Having a solid credit score can save you tens of thousands of dollars by lowering your borrowing costs. So use credit cards, but always pay off the balance each month. If you don’t know what’s in your credit report, you can request to have a copy mailed to you for free by contacting the various credit bureaus. If you find any errors in your credit report, be sure that they are corrected.

If you want to understand your priorities, look at where you spend money each month

You have to understand your spending habits if you ever wish to gain control of your finances. The goal is to spend money on things that are important to you but cut back everywhere else. Track your spending for a while. This means write down what you’re spending your money on and how much you’re spending. Then review your spending to see where your money is going. There’s a good chance you’re spending more money than you expected on several things that don’t really matter to you. Pay yourself first, make sure you but some money aside for savings, and then spend the rest where it matters.

Automate everything

The best way to save more, avoid late fees, and make your life easier is to automate as much of your financial life as possible. Most creditors as well as banks and other financial institutions allow you to set up automatic payments. This way you won’t have to worry about missing a bill (and paying interest and late fees if you do).

Get the big purchases right

Some of the most expensive purchases in your life are your home and your vehicle. You need a home and you likely need a vehicle, but that doesn’t mean you have to spend as much as you can possibly afford (or more) on these items. You don’t have to have the biggest house on the block or the fanciest or newest car. Choose an option that fits within your budget instead.