Simple Personal Finance Rules of Thumb
The following is a guest post by blogger, economist and fan of this site Kostas Chiotis.
Dealing with your finances can be very tricky. This is particularly true if you have many demands for your hard-earned income. I suspect most people do.
Once some financial problems begin they can quickly spiral out of control, there are real reasons many people are in major debt and can’t dig out of it.
Effective money management is not just about watching where all your money goes, or just staying out of debt. You need to protect yourself and educate yourself about various financial products and accounts, amongst many other things.
My simple strategies and tips to help
When it comes to personal finance I believe there are some simple rules of thumb that can apply to many people – what I tell my American counterparts at least. (Mark wrote a similar article for his Canadian friends here – his simple saving and investing rules of thumb.)
Here are my tips to simplify your financial life and ease any financial strain – tips that should put you on a solid financial path sooner than most.
- Spend less than you make: The obvious advice really never goes out of style. It is however surprising just how many people ignore it! You should always ensure your outgoing expenses are not at the same level as your income. If you fail to ignore this golden rule there is no buffer to cover unexpected costs such as household repairs or medical costs.
- Educate yourself: Another obvious truth but it’s critical to educate yourself so you develop a better understanding how to manage your finance. This means you need to make some financial literacy investments in you. You will find many personal finance books on Mark’s site and I’ve got dozens listed by many financial experts on my site as well.
- Protect yourself: Mark recently wrote about this theme on his site – with the Equifax breach and what you can do about it. More and more, protecting yourself against issues that could cause financial problems is becoming increasingly more important. In short, if you cannot afford to lose it then you need to protect it. I recommend you always disaster-proof your life.
- Simplify your portfolio: Welcome to the best time to be an investor. You can now tap into various resources to make managing your investments easier. The more simplified your portfolio is, the more likely you’ll stick with it. These days, you can gain access to a wide range of personal finance apps and software to manage a portfolio. Of course, everyone has different ways of budgeting so find a simple budgeting approach that suits you.
- Reduce high interest debt: Many people are unfortunately accruing high interest debt these days. This comes in the form of credit card debt, high interest loan repayments, among others. If this is you, realize by only paying the minimum debt repayment every month, you’ll never get ahead. You will waste potentially hundreds if not thousands of dollars making just interest payments. Consolidation of your high interest debt into one (lower) loan payment is one way to reduce to your financial burden.
- Get advice if you need it: If you are drowning in debt and cannot see a way out, it is important to seek advice from experts. Consider reaching out to a government agency – including these contributors in Canada. This helps ensure you get valuable advice and services free of charge.
Conclusion
Regardless if you live in the U.S. or Canada or elsewhere, whatever your financial situation is, there are always ways to improve your money management ways.
With more and more households experiencing debt issues and personal finance problems, the range of resources available to help has widened – considerably. Whether you need tools to help you budget, tactics to manage your debt, solutions to increase income, or government services for financial assistance, you should have no problem accessing them.
I wish you well in your financial journey and encourage you to tap into the various resources above to improve your financial future.
Kostas Chiotis is a blogger, economist and fan of My Own Advisor. You can find his blog at FinanceBlogZone.com or follow him on Twitter and Facebook for regular updates. Image courtesy here.
Mark
My name is Mark Seed - the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've surpassed my goal and now investing beyond the 7-figure portfolio to start semi-retirement with. Find out how, what I did, and what you can learn to tailor your own financial independence path. Join the newsletter read by thousands each day, always FREE.
Yeah – those are the cornerstones of personal finance right there. I would also add in investing at an early age and understanding the benefits of compounding interest/returns. You could also add in here smaller tips such as only purchase what you need, price shop.negotiate everything, and pay your bills on time.
Thanks for the great read this morning!
Bert
Thanks for sharing Bert. For sure, starting early is a benefit.
I like simplicity. Having said that, this kind of article is mostly targeted at those that are newer to participating in a financial journey. (note I said newer without specifying any kind of age). As an addendum to the “educate” category, don’t buy the books listed in the links, borrow them. Also read up on free financial forums, lots of interesting reading there.
Agreed…it was a 101 article Lloyd from another blogger who really wanted to post something on my site.
Good post. The comments above are very interesting. We are bombarded with messages promoting consumerism in are society starting at a very young age. We usually only get advice on good personal finance habits if we are so inclined and seek them out later in life. I think that contributes a great deal to the issues we discuss here. Tom
Consumerism is an issue for sure. We are bombarded by marketing.
re: we’re not as smart as we used to be.
I’d say it’s vastly more complex than declining IQ.
For instance, and this is merely an icing on the cake example, over the last ~40 years there has been almost no wage growth which means the producers and owners are keeping more of the available money and the workers and taking less. Couple that with continuous, and sometimes explosive, price growth (as well as the boom-bust cyclical nature of Canada’s resource-based economy)…yeah, it’s going to be a challenge to any household to gain traction. When you have zero finances left at the end of the month, why bother to learn about personal finance?
As per RBull’s FP link, “Economic Growth…Debt Level is Now Highest…”…as preciously stated, growth is derived from two sources: production and/or debt. They both do the same thing immediately, but debt steals future production/returns. Also another huge headwind for the public, cheap debt. 1) why bother working more (or learning more) when often the cost of debt is minimal, and 2) when costs outstrip your paycheque…many people will opt for the less painful choice (see #1). Many people are employing debt simply to avoid a declining lifestyle.
RBull gives a great parallel example of personal health. The “developed world” currently enjoys the highest ever standard of living — we are living longer than ever before — yet we are more unhealthy than ever before (e.g. diabetes and obesity epidemics). People do not always choose the best/healthiest option available. Not only that, but when said producers/owners are doing all they can to persuade the population to buy their product (i.e. turn personal income into corporate profit)…it’s not always going to be about how smart we are.
Messy, complex situation with no easy fix.
“Many people are employing debt simply to avoid a declining lifestyle.” No debt we are seeing this but there will be a tipping point eventually!
Very complex indeed.
I’m inclined to agree – we have a severe disconnect and obviously not smart behaviour, that requires more than already available information. Needs massive societal change – governments that lead by example, families and educators that teach and set examples for early age children, rules that tighten credit and stop punishing savers, tighten marketing/lending deceptive practices. Not simple but needs to be done. Same issues with personal health issues in this country- terrible personal habits with eating and sedentary lifestyle = huge crisis looming. Lots of information available, all known etc but it continues and worsens.
Good basic personal finance rules never go out of style. We simply choose to ignore them. I remember reading The Richest Man in Babylon 30+ years ago and it was written 60 years before that, with parables on ancient times.
We are way past time for a wake up call.
http://business.financialpost.com/business/canadas-economic-growth-has-come-at-a-price-its-debt-level-is-now-highest-in-the-developed-world
I think it’s important to teach the kids that money is hard earned and should not be spent without caution and thoughts. I give my kids allowance and they can choose how they spend it. Right now they can also save the money in the Daddy bank and earn interest (much higher than real bank, LOL). Sometimes we go to grocery shopping and the kids want to buy something that I think not worth it. In this case I will ask them to use their own money to buy. Half of the time they decided to buy, half of the time not. If they decide to donate the money for a worthy cause, we match the amount.
I am quite satisfied with them now seeing they do not spend all of their money and saved quite a bit of it. But of course I think I am the kind of parents who spoiled the kids a little bit with lots of toys already. They are still very young hopefully they will grow up with good financial sense.
May:”I think it’s important to teach the kids that money is hard earned and should not be spent without caution and thoughts.”
Add to that, kids should be taught/shown the benefits of investing. They may not understand or care much at the early ages, but once they begin to earn money, that’s when you might be able to reinforce the the idea. If they can see how the money you invested for them earlier, has grown and the income increased, then they may wish to add funds themselves. If they get into the habit of adding a portion of their earnings to investments, that’s how they will eventually see its benefits.
I’m by no means a perfect saver but I am very thankful my parents instilled in me the value of saving money.
We are way past it…for sure. Makes me wonder if we should be moving at all… Post to come. Housing dilemmas Part 2 🙂
It’s pretty sure the country as a whole and all citizens will pay in some way for all of the gorging – both debt and health wise.
Looking forward to your dilemma update.
Just posted. 🙂
re: ”With more and more households experiencing debt issues and personal finance problems, the range of resources available to help has widened – considerably.”
There’s obviously a severe disconnect. If the amount and availability and quality of information and resources and tools is ever expanding…but the number of people experiencing debt issues (both in breadth and depth) is also expanding…one or both sides of the equation is not working.
With the public completely awash in readily available information etc., and with Canadians currently harbouring the highest debt levels in the world — 100% of GDP — the very obvious conclusion is that more information does not help.
All these “Rules of Thumb” have existed for generations yet the growing majority continually ignores them. Again, if we can’t adhere to a handful of simple rules, more complex or convoluted forms of information and resources aren’t going to correct anything.
A higher degree of financial well-being (both in depth and breadth) requires behavioural changes. Unfortunately, these changes can’t be accomplished with more information, be it new information or simply repeating existing information.
I think this says more about our behaviour than anything SST. Meaning, we’re not as smart as we used to be. Thoughts?