We, as humans tend to overcomplicate things. Topics we think are complex are actually a combination of simple concepts when viewed at a 50,000 ft level. Personal finance is no different. At first glance it seems difficult to learn, but when viewed through a wide lens, there are only 3 main concepts to learn.
Rule #1 – Spend Less Than You Earn
This rule seems very obvious but its actually difficult to follow. In reality, 50-70% of Americans have admitted to living paycheck-to-paycheck at some point in their life. Complicating this matter is the fact that we as humans, are influenced whether we like it or not, by the behavior of those around us.
There are various reasons for living paycheck to paycheck however high-interest credit card debt, student loan payments, increasing housing expenses, and our desire to keep up with the Joneses, are common culprits. However please know the best way to build to build wealth is to keep as much of your money that you earn. To do this, we need to spend less than we earn, and avoid lifestyle creep as we age.
With that being said, that brings us to rule number two…
Rule #2 – Pay yourself first, EVERY TIME
Pick your favorite personal finance book (some of my favorites: Rich Dad Poor Dad, The Richest Man In Babylon, The Millionaire Next Door, The Intelligent Investor, I will Teach You to Be Rich) and you’ll see the same concept over and over: pay yourself first. It’s hard to adhere to this rule if you aren’t following Rule #1, which is why Rule #1 is Rule #1. But I’ll say this is rule is arguably just as important.
You should strive to set a goal of paying yourself 20% of what you make every time you get paid. An easy way to do this is to setup automatic deposits into your savings or investment accounts to ensure that you remain on track. There are a number of options on where to deposit this money and a great place is in your five essential accounts to build generation wealth.
Whatever amount you decide to save/invest, make sure you then adhere to Rule #3.
Rule #3 – Let Compound Interest Work For You
Albert Einstein once called Compound Interest the 8th wonder of the world. Its an awesome concept that when used properly allows you to supercharge your savings over time. The key factor in how much money you make is time and the second key factor is your expected interest rate. NO matter what, be patient, and allow your money to work for you. If you’re ever intrigued about the potential earnings from saving/investing use a compound interest calculator.
Lastly, personal finance can be difficult but it doesn’t have to be if you keep these simple concepts in mind. The reality is we can all build the wealth we desire if we stick to these simple rules.
As always if you have questions or concerns regarding creating an emergency fund, investing, real estate, insurance, or planning for the future, don’t be afraid to speak with qualified financial advisor. Smart Asset has a great tool to find an advisor in your area or feel free to email me (contact@surgifi.com) to help you on your path to financial independence.
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