The media, money gurus, investment firms — they all have a way of making the world of personal finance seem hopelessly complex. We’ve all seen otherwise competent, capable adults go crossed-eyed when the topic of money management comes up. Don’t be intimidated by the talking heads and conflicting advice, though. The most valuable rules are usually the simplest to understand. Here are the 10 money rules every working adult should know.
The original article has been edited here for length (…) and clarity ([ ]) by munKNEE.com to provide a fast & easy read.
1. Understand your income and expenditures
Knowing exactly how much money you have coming in every month — and where it all goes — is the foundation of good personal finance. It’s the first step in creating a realistic budget, identifying money habits that are dragging you down, and avoiding dangerous credit missteps.
2. Create a budget (and stick to it)
Budgets are financial fences we create for ourselves. Without them, it’s far too easy to wander off (overspend), panic (abuse credit), and get lost (end up deep in debt).
Build a budget that addresses your needs today and helps you prepare for tomorrow by following the 50/30/20 rule:
- Devote 50 percent of your income to necessities like housing and utilities;
- 30 percent for wants such as travel, entertainment, or dining out;
- and 20 percent to financial goals like paying off debt and saving;.
(See also: Stop Using These 5 Excuses Not to Budget)
3. Establish goals
Goals give shape to the sacrifices we make and the effort we put into managing our money wisely. Set realistic and measurable financial goals for yourself.
- Do you want to pay off your credit cards within six months?
- Save enough for a down-payment on a home within five years?
- Retire by 60?
Track your progress and reward yourself for incremental successes.
4. Live below your means
Spending less than you make is a total power move. Why? Because it leaves you with a surplus — seed money for every financial goal you have. However modest it may be, that surplus ensures that you’re moving forward and not just treading water financially. (See also: 5 Dreams You Won’t Achieve Unless You Live Below Your Means)
5. Save aggressively
Once you understand the power of living below your means, you can get strategic about saving. Turn saving money into a challenge.
- Can you get closer to (or move beyond) the standard budgetary rule of saving 20 percent of your income?
Challenge yourself to reduce your overhead, earn extra cash, and save more.
6. Pay attention to the small stuff
Many budgets die from a thousand tiny cuts. Though the costs seem negligible at the time, all those morning lattes, lunches out, and ATM fees can really add up. Respect both the dollars and the dimes of your budget. In other words, sweat the small stuff.
7. Maximize your 401(k) match
If you’re fortunate enough to work for an employer who matches a percentage of your 401(k) contributions, make the most of it. Contribute to the match limit (and beyond, if you can). Though it may take a few years to fully vest in those funds, every matching dollar is free money. (See also: 7 Things You Should Know About Your 401(k) Match)
8. Prepare for the “what-if” moments
Life is seldom a smooth road. Economic bubbles burst. Layoffs happen. People get sick. Weather these financial storms by building an emergency fund. Not sure how much to save? Start with this rule of thumb: Squirrel away enough cash to cover your minimum household expenses for at least six months.
9. Never buy a new car
Financially-speaking, buying a new car is a losing proposition. New vehicles can depreciate up to 20 percent or more each year for the first five years and buyers who finance their purchase face an even bleaker equation: Based on 2018 figures from Edmunds, the APR of a new car loan currently averages 5.2 percent — for an item that’s rapidly losing value. It just doesn’t make sense. (See also: 3 Reasons Why You Should Never Buy a New Car)
10. Protect your loved ones
Estate planning is a fundamental part of smart personal finance. Protect those who are dependent on your income by purchasing a life insurance policy. Though the guidelines vary based on other income sources, family size, and financial obligations, the general rule of thumb is this: The life insurance death benefit should equal seven to 10 times your annual salary. (See also: Term vs Whole Life Insurance: Here’s How to Choose)