The fundamentals of personal finance aren’t very complex and I doubt you’ll find anyone who can reasonably dispute that but it’s a lot like the law, the difficulty is in the various nuances and unique scenarios that always seem to crop up. I’d like to put these fundamental concepts up for critique and ask what you think of them, whether one should be replaced, one should be added, etc. so that we can reach a consensus on what the ten fundamental concepts of personal finance are.
1. Spend Less Than You Earn
Don’t eat more calories than you burn, don’t spend more dollars than you earn, it’s pretty simple and it’s the number one thing that you can do that can guarantee you’ll be financial prosperous. Heck, you can probably stop reading here if you follow #1 and do just fine.
2. Thinking About Money Sucks, But It Can Be Easy
Thinking about money and thinking about the future isn’t a lot of fun for most people. You probably don’t know what you’re doing this weekend, let alone what you’ll be doing when you retire in 20, 30, 40, or 50 years. That’s okay, the beauty of a lot of financial planning is that you can set it and forget it, Ronco style, enjoying the fruits of your smart decisions down the road with a minimum of pain now. For example, if you’re employed and have a 401(k), just drop 5% into it each month. You probably won’t feel the pain but you’ll enjoy seeing the balance when you retire.
3. You Don’t Have To Follow The Crowd
If you see the latest stock or investment start climbing in value, you may feel tempted to jump on the bandwagon so you aren’t “left behind.” This is as true in other aspects of life as it is in investing and it’s something that you have to come to grips with. Not moving forward is not the same as not moving back, you have to remember to pick your spots and remember your fundamentals, whether its your moral code or your investing decisions. Sometimes the boat sails with you on it and sometimes that boat hits an iceberg and sinks to the bottom of the sea, remember your fundamentals and you’ll end up doing just fine not chasing the latest fads.
4. Retirement Savings Order – 401k With Match, Roth, 401K, Everything Else
When it comes to saving for retirement, nothing can beat a 401(k) plan where your employer kicks in a few dollars to match your own contribution. Nothing in life is free but this is pretty darn close. Once you maximize that, start funneling money into a Roth IRA until you max that out. Then, polish off the 401K. If you still have money you want to save, put it in an investment fund but remember to enjoy life.
5. Avoid Debt Unless It’s For A House, Car, or Education
There are three things in life that you should be willing to go into debt for – your house, your car, and your education. Heck, the government even gives you a tax break for financing your house and your education, so you should take advantage of it while you can. As for the car, it’s probably necessary if you want to get anywhere in most places of the United States. With all three, don’t go all out, only buy that which you think you’ll reasonably need and you’ll do fine. That also means don’t get deep deep into debt if you can avoid it, so don’t buy too much house and too much car – ultimately no one else will care (or they will take advantage of you, which is even worse).
6. Showing Off Breeds Either Jealousy or Annoyance
You know that whole keeping up with the Joneses concept? Think about the last time you saw someone drive around in a flashy car, you probably thought he or she was overcompensating for something. How about that big television they were showing off to you? How about that gynormous house? You probably were either jealous of them or you were annoyed at them showing it off, either way the feeling is negative. So, why would you want to try to keep up and have other people be jealous of you or annoyed at you? Either way they won’t like you!
7. Scrap The Latte Factor
This is a term coined by David Bach and it’s the idea that if you cut out small unnecessary spending, like a cup of Starbucks, you can put that money away and it can grow tremendously. Think of all the little dinky crap things you buy, maybe from impulse, maybe from habit, and try to cut them out because you could save yourself some serious money.
8. If It’s Too Good To Be True, It Is
There will come a time when someone will come to you with an offer that seems unbelievable, whether it’s a hot stock tip or a great investment or some other scheme – don’t buy it. The true path to financial prosperity takes hard work and diligence, not sending envelopes of money or cashing a check for a guy in Nigeria. Your brain can sniff out a scam, don’t let your greed block out the scent of a bad deal.
9. Life Is About Enjoyment, Not Money
You can’t buy love and the best things in life are free. Think about all the lottery winners who end up dead in a ditch, or the star athletes getting into domestic disputes and thrown in jail, or the powerful executive that missed his or her children growing up – life isn’t about the cash. Life is about enjoying the time you have here with your loved ones, not about getting more and more money. Money can’t buy you time and time is precious.
10. Always Act Morally, Ethically, Truthfully & Legally
No matter what you believe in spiritually, the judge of your actions here on Earth will ultimately have his, her, or their say and money carries no weight there. And if you don’t believe in anything past this life, always remember that your Mom is watching.